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2 growth stocks that benefit from Australia’s $8 billion animal obsession

Credit: Michael Gil

The Australian economy has always had a link to animals, with Australia once said to “ride on the sheep’s back”. This was a reference to the outsized importance of the wool industry to the nation in the late 1800’s, with the export and sale of wool underpinning the national budget for many decades.

These days, however, our ties with animals are much more skewed towards a domestic setting, with pet ownership estimated at 25 million pets in the nation across 7.6 million households. In terms of reach and numbers, that means that the market for pet care is one of the few to rival the market for consumer staples like groceries and petrol.

So which two stocks are the best placed to capitalise on the high levels of pet ownership in Australia?

The established giant

Greencross Limited (ASX: GXL) began life as a consolidator of veterinary practices. The model was to acquire profitable pet primary care locations in reasonably exclusive territories. This allowed the company to step in and use its expertise to help in running the non-core business functions of vet practices, leaving the qualified vets and nurses to focus on animal care rather than administration.

The business model allowed Greencross to rapidly expand its earnings by acquisition, as revenue and profit both grew, fuelled by debt and capital raisings. More recently, Greencross pivoted and expanded its business beyond operating vet surgeries.

The company changing acquisition of Mammoth Pet Holdings, which owned the big box retail chain Petbarn, materially expanded revenue. However, the shift to a retail and vet services model has created some problems for the business as a whole, as retail is typically more challenging and cyclical, as compared to pet health care, which is far more defensive in nature.

The company has recently begun initiatives to co-locate its Petbarn stores adjacent to or nearby its vet practices, which has shown encouraging results and increased the opportunity for cross-selling and repeat business. The near 3 million members of the loyalty programme also provides a meaningful consumer database that can be leveraged to grow future sales.

The new kid on the block

In comparison, National Veterinary Care Ltd (ASX: NVL) is a new entrant to the marketplace, having only listed on the ASX in 2015. The business model is a familiar one, with the company acquiring vet clinics and pet hospitals and allowing vets to focus on pet care.

The company is currently the number two player in the Australian market by a substantial margin with 34 clinics, with Greencross still the largest. National Vet Care also has the interesting distinction of having a number of ex-Greencross management on board.

Some analysts and investors believe that moving away from a core focus of vet care saw Greencross dilute investors and earnings and it undoubtedly weakened the return on equity of Greencross. In contrast, National Vet Care has clearly stated that the focus will be on expanding the size and earnings of its portfolio of vet clinics, and management has a clear strategy for executing this.

The strategies include the trial of a market leading annual membership price for the wellness program, which functions a little like private health insurance for pets. A trial has been successful, and should provide a source of recurring revenue going forward with pet owners enjoying the opportunity to spread their costs across 52 weeks rather than dealing with the bill shock that can come from large and unexpected vet bills when emergencies arise.

NVC also has sufficient scale to negotiate beneficial discounts with suppliers based on the high volume of purchases, which has beneficial effects on the bottom line of the company as the cost of operations falls as a result of these savings.

The takeaway

The annual spend of Australians on their four legged, winged and scaled friends exceeds over $8 billion. As the two largest specialist players in the space, Greencross and National Vet Care are well placed to continue capturing a larger slice of this market, although I prefer the undivided focus on the higher margin side of the market that National Vet Care offers investors.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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