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Making pets the investor’s best friend

What began thousands of years ago has blossomed into a multibillion-dollar industry. Originally an alliance where each benefitted from the other’s ‘special’ abilities, it has now evolved into something much more.

Of course I’m talking about humans and our four-legged friends. As technology replaced the utilitarian function of our pets, their roles in our lives and the value we place on them has shifted dramatically. Our four-legged friends are now regarded as part of the family, and treated as such.

In Australia, 63% of households now own a pet, with more than half of all households owning a dog or a cat. In the pet industry, turnover has risen to $2.5 billion, as new markets spring up, such as day spas for our animals and kitten cafes in Japan – where urban dwellers can spend some time with a kitty companion over a latte.

Where we once had 350 veterinary graduates per year, that number has now increased to 550 graduates, with three universities opening veterinary schools in recent years.

Greencross steps up

Taking advantage of the growing presence and value of our pets is one Australian company. Greencross (ASX: GXL) currently owns and operates 92 animal hospitals, clinics and laboratories across Australia, with 55% of them located in Queensland. With operations in Victoria and NSW growing, Greencross recently entered the South Australian market.

In years gone by, most vets operated as stand-alone clinics, but that appears to be going the same way human doctors have gone. Now doctors are mostly located in medical centres, with several doctors sharing the infrastructure and administration. The benefits are many, including allowing vets to practice what they are best trained for – looking after animals, while letting someone else focus on the bills and paperwork.

With new graduates having less desire to run their own practices, and current owners requiring succession planning, it makes perfect economic sense for multi-vet animal hospitals to be set up. Veterinary hospitals now cater for a wider range of services for pets, with technologically advanced equipment.

Growth

Greencross is the first mover in the highly fragmented veterinary services industry, and with over 2,600 practice locations and 1,800 enterprises nationally, there’s plenty of scope for the company to grow. Greencross has just 4-5% share of the total market, with an 11% share in Queensland, its home state.

The majority of future growth will come from the acquisition of 1-2 practices per month, mainly funded through debt and free cash. Interestingly, the company is handling around 30 enquiries from vets at any one time, suggesting it doesn’t have to search too hard to find its next acquisition.

Greencross also has other levers it can pull to see the company grow faster than the industry average. As the company grows, it will achieve greater economies of scale. That will allow it to take advantage of better relationships with suppliers and cut costs.

New products, cross selling additional services and up selling higher-priced items will drive sales, and increasing the number of vets per centre will also add to growth. The company is also looking at potential expansion into other pet products and services such as retail and online centres, training and behaviour programs, specialised vet pathology as well as grooming and boarding.

Health insurance for pets

In an effort to provide more ‘human-like’ services for our four-legged friends, Greencross recently introduced a preventative pet health scheme, allowing members to pay an annual fee to receive free regular checkups, as well as discounts on food, medication and other services. The goal is for our pets to live a happier, healthier and longer life – at the same time adding stable, recurring revenues.

Revenues have grown on average by more than 26% per year over the past five years, while earnings per share rose 24% in the six months to December 2012. Trading on a prospective P/E ratio of 22 and paying a fully franked dividend that should increase over time, Greencross looks attractive.

Foolish takeaway

To have a pet is to know unconditional love. No tweet, text or email can compare to the affection one feels when the cat decides it wants your attention or the greeting you get from the dog, just because you came home.

In an increasingly technological world, pets are likely to become an even more important part of our lives, with a commensurate increase in the amount of dollars we spend looking after them. That’s good news for Greencross, and one of the reasons to add the stock to your watchlist.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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