2 growth stocks to benefit from the fast-growing pet care industry

Pets are an integral part of Australian families as owners think of them as their fluffy children. The combined estimated number of cats & dogs in Australia has increased from 5.76 million in 2009 to 7.5 million in 2012 according to the RSPCA. A large part of this increase is because of the rising human population.

In 2009 the Australian human population was 21.69 million meaning a ratio of 3.76 humans for every cat and dog. Whereas in 2012 the Australian human population was 22.72 million, so the ratio was 3.02 humans for every cat and dog.

A growing human population and pet-to-human ratio suggests there is a big organic growth opportunity for vets and pet retailers.

With pet owners increasingly likely to get pet insurance too, it shows owners are willing to spend on their pets.

Greencross Limited (ASX: GXL)

Greencross is the largest provider of pet services in Australia with a market capitalisation of $826 million. It has the biggest network of vets with its Greencross Vets brand and it’s the biggest pet-only retailer with its Petbarn and Cityfarmers stores.

Greencross’ 2016 results were encouraging; it grew its revenue by 14%, underlying net profit after tax by 10%, and the dividend by 9%. Greencross isn’t growing as fast as it used to, but these are still positive numbers.

One of the other encouraging items from its annual report is that Greencross’ cashflow is getting steadily more positive – this means it can fund acquisitions from its profits rather than debt.

Greencross is aiming to achieve a 20% share of the pet market. With its new private label brands and increasing co-location stores, there’s every chance Greencross will get to 20% and beyond. Of course, Wesfarmers Ltd’s (ASX:WES) Coles and Woolworths Limited (ASX:WOW) are major players and competitors in the pet retail sector too.

Greencross is currently trading at 23x FY16’s earnings, with a grossed up dividend yield of 3.78%.

National Veterinary Care (ASX: NVL)

National Vet Care is the smaller, vet-only competitor to Greencross and it was listed in August 2015. Leadership have stated that it will only ever be a veterinary business – retail is a tough and low margin market to compete in.

With 44 veterinary clinics (expected to increase to 50), it’s smaller than Greencross’s 155 clinics. However, each vet that’s acquired will provide a larger percentage boost to revenue and earnings because of its smaller size.

In its latest report, National Vet Care announced it expects to start paying a dividend after its 31 December 2016 results.

If National Vet Care performs similarly to how Greencross did in the first few years, there could be a lot more growth to come through acquisitions. National Vet Care’s leadership team even includes a number of ex Greencross management – so you would expect a similar strategy.

National Vet Care is currently trading at 94x FY16’s earnings with no dividend paid. However, in the next couple of years it could grow strongly – which is why the price/earnings ratio is so high.

Foolish takeaway

Both of these pet businesses would be good options to benefit from the growing pet population. National Vet Care may be a bit expensive at the current price, so Greencross would be my pick of the two at current prices. Either company could be a good addition to the portfolio of long-term investors.

These Low Interest Rates Could Totally Devastate Your Retirement!

With global interest rates set to remain at these "emergency low" levels for years -- perhaps even decades -- unless you take decisive action NOW, your retirement could be seriously at risk. Click here to learn how to NOT run out of money in retirement.

Motley Fool contributor Tristan Harrison owns shares in Greencross. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.