There aren't many large players in the pet market, it's a very fragmented industry. This means that there isn't much competition for any businesses that want to have a go at consolidating the market.
This is exactly what Greencross Limited (ASX: GXL) and National Veterinary Care Ltd (ASX: NVL) are aiming to do.
Greencross had free reign to acquire vets a couple of years ago, which was one of the main reason its share price is up over 353% over the last five years. Another big boost to growth was acquiring the pet retail chains Petbarn and Cityfarmers.
National Veterinary Care listed on the ASX in August 2015 with the attraction of being a vet-only business, hence the name. It actually has a number of ex-Greencross management, obviously aiming to recreate the growth that Greencross had early on.
However, there's more reasons to like these two pet businesses than just a fragmented industry:
Growing pet population
The number of cats and dogs in Australia is growing faster than the human population.
In 2009 the Australian human population was 21.69 million and there were 5.76 million cats & dogs, a ratio of 3.76 humans for every cat and dog.
In 2012 the human population was 22.72 million and there were 7.5 million cats and dogs, meaning a ratio of 3.02.
So not only is the pet population growing, but it's showing there's an increasing love for a furry child in our lives. If this trend continues it would result in a bigger addressable market for Greencross and National Vet.
Defensive nature of pet industry
A pet's need to visit the vet has nothing to do with economic cycles, it's when they're sick or injured. In some ways you could think of vets as the animal equivalent of Ramsay Health Care Limited (ASX: RHC).
They will also always need food and toys, which vets sell in their clinics as well, although this point is more relevant to Greencross' retail businesses. Seeing as it sells pet food, it could be equivalent to a pet supermarket – a pet version of Wesfarmers Ltd's (ASX: WES) Coles.
Greencross is trying to profit from its businesses' potential synergy by co-locating a vet and Petbarn in the same building, so far this tactic is working very well and being more profitable than expected.
Funding help with insurance
Vet bills can be an unexpected expense for a tight family budget, so there is a growing trend of pet owners taking up pet insurance to cover anything that comes up. This means people will be more willing to visit a vet when necessary.
It also means the bigger players are more likely to have more bargaining power, similar to how Ramsay and Medibank Private Ltd (ASX: MPL) have come to an arrangement.
Foolish takeaway
I think both businesses are in a strong, growing sector with defensive attributes which is why I'm a shareholder of both companies.
Greencross is the more diverse of the two and its co-location strategy is a sound strategy, it's trading at 17x FY17's estimated earnings with a grossed up dividend yield of 3.8%.
National Veterinary Care could have an explosive few years of growth, similar to Greencross' early days, as it acquires vets and remains a vet-only play. It's trading at 21.2x FY16's earnings (assuming all acquisitions were made at July 1, 2015) and is expected to start paying a dividend when it reports next month.
Both of these businesses could be strong dividend and growth stocks over the coming years. But there's an even better business than these two in my opinion, with a large dividend and big overseas plans, you don't want to miss out investing in this stock.
