Greencross Limited (ASX: GXL) is the pet care business market leader with its Greencross Vets and Petbarn stores.
By acquiring a number of vets as well as the Petbarn and City Farmers retail chains over the last few years, Greencross has managed to grow its market capitalisation to $780 million. At the end of FY16 its network consisted of 155 vets and 221 retail stores.
Greencross has enjoyed a good run and here are three reasons why I think it can keep growing strongly:
Co-Locating Stores
Greencross is in the process of placing a Greencross Vet inside as many Petbarn stores as it can. This is a powerful tool because it allows cross-selling between each business.
These joint locations are performing so well that Greencross wants to bring forward how many it's creating this financial year. Management has forecast that by the end of FY17 there will be 32 co-located stores in total.
Growing pet population
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.
The pet population has actually been growing quicker than the 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.
It's hard to know which way this ratio will go in the future, but it's encouraging for Greencross that there were more pets in 2012 than previously. As the Australian population continues to rise, the pet population will roughly follow. This trend will also help National Veterinary Care Ltd (ASX: NVL).
Results
Greencross has been growing its revenue, profit and dividend for a number of years now.
During FY16 it grew revenue by 14%, underlying net profit after tax by 10% and the dividend by 9%. Greencross was growing quicker when it was a smaller business, but these numbers are still encouraging.
One of the most pleasing things about FY16 is that its cashflow is getting steadily more positive. This means it can fund acquisitions from its profits rather than debt, which will further boost returns and the balance sheet.
This is particularly important if funding is about to get more expensive with rising interest rates in the USA, which makes our loan rates more likely to go up too.
Foolish takeaway
Buying businesses in growing markets is usually a good idea, particularly when that business wants to grow its market share to 20% of the pet market. Greencross has shown good performance to get to the size it is today. Its co-locations could be just the spark for another level of growth over the next few years.
It's trading at 16.5x FY17's estimated earnings, which isn't dirt cheap, but I think it's a reasonable price to pay for this growing business in a growing industry.
