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2 companies to profit from Australia’s love of cats and dogs

Australians love their pets – and they own a lot of them. 

According to a 2016 report by Animal Medicines Australia (AMA), almost two thirds of Australian households owned at least one pet, meaning Australia had one of the highest rates of pet ownership in the world. In fact, at 24 million, the pet population actually exceeded the human population.  

Statistics were similar for New Zealand, where 64% of households owned at least one pet and the total pet population was 4.6 million. 

According to the same report, Australian households were estimated to have spent more than $12 billion on products and services for their pets in 2016, with $4.2 billion (or 35%) spent on food and a little over $2 billion (18%) spent on veterinary services. Although the overall pet population has declined by 9% since 2013, cat and dog ownership numbers are up, and these animals require more trips to the vet in order to keep healthy.  

Expenditure on pet products and services in New Zealand – where in 2016 44% of households owned at least one cat – was estimated to be around $1.8 billion.  

The bottom line is that the pet industry is worth a lot of money, and the amount that we spend on our pets is only going to grow. So you might be thinking that it’s worth adding some exposure to that sector to your portfolio. 

Greencross Limited (ASX: GXL) is the largest and most diversified pet care company in Australasia. It operates a network of veterinary clinics, retail stores, grooming salons and dog washing facilities across ANZ and provides additional services like pet sitting, training and adoption. It owns the Petbarn and City Farmers brands in Australia and the Animates brand in New Zealand and also has an expanding online presence. 

In 2017, Greencross’s revenues increased by 11% to $817 million, EBITDA was up 15% to $100 million, and NPAT was up 21% to $42 million. Its share price has risen significantly since mid-November without much major news out of the company. It’s still trading at a fair multiple of 18x earnings, with a dividend yield of just under 3% 

National Veterinary Care Ltd (ASX: NVL) is a growing company focussed exclusively on veterinary clinics in Australia and New Zealand. It has been the growth success story for the sector in 2017, with its share price rising by about 36% over the last 12 months to $2.86. The company was even able to raise an additional $14.6 million through an oversubscribed private placement in June 2017 without it having much of a dilutive effect on its share price. 

In 2017, NVL’s revenues increased by 51% to almost $67 million, EBITDA was up 57% to $12 million, and NPAT was up 53% to a little under $6 million. It currently trades at 34x earnings with a dividend yield of about 1%, which seem reasonable for a growing company. 

The company also recently settled the last of 7 vet clinic acquisitions it has made so far in fiscal year 2018, which it expects will add an additional $10.3 million to its FY18 annual revenues. Its total number of integrated veterinary businesses now sits at 64, versus Greencross’s 147 GP clinics and 30 specialty and emergency hospitals.  

NVL still has a long way to grow before it can really threaten the industry leader, but its explosive uplift in annual revenues in FY17 shows it is definitely clawing out some market share of its own. 

Foolish takeaway

It’s tough to try and pick a winner from these two veterinary companies.  

National Veterinary Care is actively pursuing growth opportunities and looks the most likely to see rapid expansion of its revenues as it integrates new clinics into its network. And I still think it offers pretty decent value at its current price. 

Greencross is the established player in the industry, and has the market share to lose, but it is also tapped into the lucrative pet food market and is naturally the more diversified of the two in terms of its product offerings. 

My pick for growth would be NVL, but I still think that, depending on your risk appetite, either of these companies offers good long term upside. And both companies offer you exposure to a sector that still seems underappreciated by a lot of investors – so I think you’re getting good value. 

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Greencross Limited. The Motley Fool Australia owns shares of NATVETCARE FPO. 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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