With 82 million U.S. households owning a pet, according to the American Pet Products Association (APPA), there’s plenty of spending to keep the critters happy and healthy.
In its 2024 National Pet Owners Survey, the APPA said it expects Americans to spend $150.6 billion on their pets this year, up from $147 billion in 2023.
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Does that mean investors are barking up the right tree when they put their money into pet products?
“My view for the animal health market is favorable,” says James Lewis, senior equity research analyst at Bartlett Wealth Management in Cincinnati.
Lewis says customers show strong loyalty to brands and providers in the pet category. Another advantage is lower development costs, relative to products designed for humans.
“The animal health market also benefits from the humanization of pets, a growing global trend,” Lewis says.
Many pet owners, he says, view their animal companions as family members and are willing to spend money to keep them around for a long time.
Here’s a look at six companies involved in the pet care industry and whether their stocks are set to benefit investors:
— Zoetis Inc. (ticker: ZTS)
— Chewy Inc. (CHWY)
— Freshpet Inc. (FRPT)
— Petco Health and Wellness Co. Inc. (WOOF)
— Elanco Animal Health Inc. (ELAN)
— Trupanion Inc. (TRUP)
Zoetis Inc. (ZTS)
Zoetis is a pharmaceutical company specializing in pet and livestock treatments.
The company’s market capitalization is $83.6 billion, and it’s a component of the S&P 500.
“Zoetis has a history of introducing new products, which generate additional revenue streams: Apoquel, a derma relief canine medicine, and Librela, a canine pain reliever for osteoarthritis, are examples of Zoetis’ product innovation focus,” says Dan Miller, portfolio manager at Gabelli Funds in Rye, New York.
When it reported quarterly earnings on Aug. 6, the company beat Wall Street estimates. Revenue grew 8% to $2.4 billion, driven by an 11% increase in the companion animal category.
Miller says analysts raised full-year guidance, and the company announced a multiyear, $6 billion share buyback program.
“We believe shares are worth north of $200 per share based on our 2024 estimates,” Miller says. ZTS closed at $188.38 per share on Aug. 13.
Chewy Inc. (CHWY)
As a consumer-facing company, Chewy and its blue cardboard boxes are familiar to many pet owners.
The company pivoted to profitability in 2023, and analysts expect earnings to grow this year before declining in 2025. The stock was recently targeted by meme traders, sending the stock soaring to a new 52-week high in late June before it quickly returned to earth.
In a July research note, Bank of America analysts maintained their underperform rating on the stock, citing weakening consumer trends after a booming business during the pandemic. The mid-cap stock continues to trade in a somewhat volatile fashion, well below its February 2021 high.
As with other pet-related companies, Chewy could see an inflation-driven decline in spending, even as inflation appears to be cooling.
“Muted active customer growth should lead to pressured revenue trends,” Bank of America analysts wrote.
In addition, they wrote, with a price-to-earnings (P/E) ratio of 30, the stock’s valuation may be a bit frothy, as it’s priced at a significant premium to its growth.
Freshpet Inc. (FRPT)
The maker of refrigerated pet food is expected to turn a profit for the first time in a decade. Wall Street recently revised its earnings estimates higher for 2024 and 2025.
Jon Wolfenbarger, founder and CEO at BullAndBearProfits.com in New York, says the stock is expensive, with a forward P/E ratio of 101, but adds that strong growth prospects are driving positive trends in the stock. The technicals, he points out, are bullish.
“It’s been outperforming the S&P 500 for the past two years, and has positive long-term and near-term price momentum,” he says.
Sales of the company’s fresh pet food have been growing at double-digit rates. Wolfenbarger says that can be attributed to the “humanization of pets” trend.
“Easing inflation pressures and strong product cost controls are helping growth this year,” he says, adding that the company targets high-income consumers who aren’t reluctant to spend on their furry friends.
Petco Health and Wellness Co. Inc. (WOOF)
Petco stores are a staple of many suburban strip malls, making it easy for pet owners to stock up.
Nonetheless, earnings have been declining. The company recently named Joel Anderson as new CEO, replacing interim CEO Michael Mohan. A new CEO is often the catalyst for a company’s growth, as a new management team brings fresh ideas and energy.
But at the moment, the technicals are bearish, says Wolfenbarger. He points out that the stock is trading below its long-term 250-day moving average, and has underperformed the S&P 500 since going public in 2021.
“Valuation is arguably low at 0.6 times forward sales, but the company is unprofitable,” Wolfenbarger says, adding that declining sales are behind this year’s quarterly losses.
“Petco is trying to implement a turnaround, but there are no signs of success yet,” he says.
The company’s $2.98 billion in debt is high, he adds, relative to Petco’s market capitalization, which stands at just $623.8 million.
Elanco Animal Health Inc. (ELAN)
Elanco manufactures and markets pet disease prevention products, with brands such as Seresto, Advantage, Advantix and Advocate being familiar to consumers.
The stock has had a choppy history of quarterly sales and earnings growth, although it’s remained consistently profitable since going public in 2018.
A growth driver has been merger and acquisition activity. In August 2020, Elanco closed its $6.9 billion acquisition of Bayer Animal Health. In July 2024, it closed the sale of its Aqua business to Merck Animal Health for $1.3 billion; cash was used to pay down $1.2 billion of debt.
In the most recent quarterly report released on Aug. 8, results came in slightly ahead of consensus, Miller notes. Revenue grew 12% to $1.18 billion, while adjusted earnings were up 67% to 30 cents a share.
“The combination of operational efficiencies and revenue growth coupled with debt reductions will lead to higher valuations for Elanco’s stock in our opinion,” Miller says. “We believe shares are worth north of $20 based on our current estimates.”
The stock closed at $13.94 on Aug. 13.
Trupanion Inc. (TRUP)
Pet health insurance sounds like a great idea, especially for multi-pet households where vet bills can pile up fast. However, the provider of cat-and-dog insurance plans has yet to turn a profit.
There are glimmers of hope: Analysts expect the company to earn 1 cent a share in 2025, and revenue has been growing consistently, although decelerating since late 2022.
“It’s an unprofitable company in a fast-growing industry, but could be helped by a new CEO with the founder stepping aside,” Wolfenbarger says.
Margi Tooth, a company veteran, recently replaced Darryl Rawlings as top dog.
The stock’s technicals, Wolfenbarger says, are neutral to bullish, with Trupanion shares recently starting to outperform the S&P 500 for the first time since late 2020.
“Long-term and near-term price momentum is starting to turn positive,” he says, although that’s occurring as earnings estimates have been cut by 16% over the past six months.
Wolfenbarger adds that Rawlings, who remains board chair, recently bought company stock, which may be an encouraging sign.
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6 Pet Stocks to Watch in 2024 originally appeared on usnews.com
Update 08/14/24: This story was previously published at an earlier date and has been updated with new information.
