Buy These 3 Pet Stocks Benefiting From Everyday Use

I thought about Pet stocks the other day while cleaning out one of the many cat litter boxes scattered throughout my house.

My wife and I not only have our own crew of felines, but we’ve also fostered and adopted out more than 30 cats of varying ages over the past year. It is not a cheap hobby; I can tell you that. 

For example, a year ago, when we would buy Friskies Pate Cat Food for cats we were fostering, it cost about one-third less than it does today. Currently, we’re going through four tins daily plus intermittent dry kibble.

According to the American Pet Products Association, Americans spent $123.6 billion on their pets in 2021, up from $103.6 billion in 2020 and $97.1 billion in 2019. Over the past four years, pet industry expenditures have grown by almost 11% a year. 

Many industries are happy with mid-single-digit revenue growth. The pet industry takes it to a completely different level. I often wish I could buy a vet clinic because then I’d be able to pay myself for all the visits to purchase food, annual checkups, dental surgery, etc. 

The list -- at least in my household -- goes on and on. 

A few years ago, I began writing about a concept I call “Everyday Investing.” I define this as investing in companies whose products I use daily or weekly. 

When it comes to the pet industry, I know I use the products and services of at least five pet care companies daily or weekly. Together, they’d make an excellent mini-portfolio.

Here’s my starting lineup. 

Nestlé (NSRGY)

The Swiss food and drink conglomerate owns a bunch of different brands. Friskies is one of them. It’s owned by Nestlé Purina PetCare, a subsidiary of Nestlé (NSRGY). In 2021, the division had revenue of 15.6 billion Swiss Francs ($16.2 billion), the second-largest segment by sales in the company. 

The first? Powdered and Liquid Beverages -- its brands include Nescafe, Nesquik, Nespresso, Starbucks, and Nestea -- with 2021 sales of 24.0 billion Swiss Francs ($24.9 billion). 

You can’t go wrong holding Nestlé stock. In 2021, it had a free cash flow of 8.7 billion Swiss Francs ($9.0 billion). That gives it a free cash flow yield of 2.7%. That’s not cheap, but you’ve got to pay up for quality. 

As I said earlier, my spending -- Friskies, Tidy Cats, Purina Pro Plan -- is a significant part of Nestlé’s free cash flow generation. I’m only half-joking. 

Spectrum Brands Holdings (SPB)

Spectrum Brands Holdings (SPB) has three operating segments. One of them is Global Pet Care. One of the division’s brands is Nature’s Miracle. We use both their Stain & Odor Eliminator for mishaps and their litter boxes for the rest of the time when things don’t go wrong with potty duty. From Spectrum’s Home & Personal Care unit, we use a Black & Decker kettle and toaster.   

Together, these two divisions generated 76% of its $808 million in Q2 2022 sales. The third segment: Home & Garden, increased sales by 16.2% in the quarter and now accounts for 24% of its overall sales. It used to have a fourth segment: Hardware and Home Improvement. It sold that to Assa Abloy (ASAZY) for $4.3 billion. The sale’s expected to close in 2022. 

Of the seven analysts covering SPB stock, all seven rate it a Buy, with an average target price of $122.71, providing investors with more than 30% upside potential over the next 12 months.

Zoetis (ZTS)

Although I’m sure my pets have used other drugs made by Zoetis (ZTS), the world’s largest animal health company, it is Cerenia -- used to treat and prevent acute vomiting -- that most often gets prescribed for our furry friends. 

When you’re licking your hair all day, vomiting and hairballs are bound to come into play. 

In Q1 2022, the company had sales of $2.0 billion, 6.0% higher than a year earlier. Of that, dogs and cats accounted for 60% of its overall revenue. On the bottom line, it adjusted net income of $625 million, 4% higher than a year earlier. 

This isn’t a significant grower, but it doesn't take much to move the needle when you’re projected to generate $8.3 billion in 2022 sales at the midpoint of its guidance. In 2021, its free cash flow was 22% of sales. If it hits its guidance in 2022, it will generate $1.83 billion, giving it plenty to pay dividends and buy back stock.           

The Bottom Line

As I rack my brain to consider the various brands we use to keep our pets in fighting shape, I’m sure there are many more I’ve left off this list. 

For example, while we no longer use Freshpet (FRPT) for our cat Boo -- she finally died at 19, going a lot longer because of Freshpet’s tasty wet cat food -- it is one of the largest holdings in the ProShares Pet Care ETF (PAWZ) at 5.61%. 

Over the past three years ended May 31, PAWZ has had an annualized total return of 12.77%, 280 basis points less than the entire U.S. market. While the returns are a bit disappointing, it has gathered almost $200 million in assets since its inception in November 2018.

Also, the other two companies where we spend a lot of money but they’re not public companies. One is PetSmart. It could go public in 2022. 

The other is VetStrategy, the largest chain of veterinary practices in Canada, with more than 350 across nine provinces. A consortium of private equity firms owns it. In September 2021, it merged with IVC Evidensia, a leading veterinary care provider in Europe. That’s got IPO written all over it.  

I could go on. 

The PAWZ investment thesis has yet to play out fully. I believe it will over the next 5-10 years. Two of the three stocks I’ve recommended in this article are in PAWZ’s top 10 holdings.

All three are benefiting from my regular patronage.