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Here’s why National Veterinary Care Ltd makes up 10% of my portfolio

It’s quite rare for an investor to allocate around 10% or more of their portfolio to a stock, unless they are very confident that it’s a good one to own.

One of the shares that I’m most confident about in my portfolio is National Veterinary Care Ltd (ASX: NVL). It is a veterinary clinic business that is steadily acquiring more clinics to add to its portfolio.

Here are four reasons why I like it so much:

Growing industry

The pet population is steadily growing in line with the human population, which makes for good organic growth when combining population growth and inflation. There were 4.8 million dogs and 3.8 million cats in Australia at the end of 2016, with total pet ownership at around 62% of households.

The overall pet industry in Australia is estimated to be worth around $12 billion, which is an increase of 42% since 2013. National Vet Care is one of the biggest veterinary groups in the country and is an integral part of this growing industry.

Defensive earnings

I would describe National Veterinary Care’s earnings as defensive because of the ‘humanisation’ of pets. We are willing to spend what it takes to keep our pets alive and healthy. It helps that more pet owners are taking up pet insurance in-case an expensive vet visit is necessary.

Most people would rather pay to keep their pet alive over buying a brand-new TV or going on a holiday, which is why I think National Vet Care’s earnings could be fairly recession proof.

Recurring revenue

One of the pleasing aspects to the pet world is how consistent a veterinary clinic’s earnings are. According to National Veterinary Care, 79% of dogs and 65% of cats go to the vet each year, this gives National Veterinary Care quite strong recurring revenue as people are unlikely to regularly switch their vet.

One of the ways management are encouraging even more loyalty from clients is its ‘Best for Pet’ wellness program, which includes various things as part of the membership. Members spend on average 94% more after joining the program.

Acquisitions

The business acquired 14 clinics in FY17. So far in FY18 the company has acquired a further 11 clinics, bringing the total up to 64.

Acquiring more clinics creates strong economies of scale, allows National Vet Care to implement its best-practice processes and should boost earnings strongly for a couple of years until a full 12-months of earnings are recognised in the business’ accounts.

Foolish takeaway

National Veterinary Care is currently trading at 34x FY17’s earnings and has started paying a dividend. I think it could be one of the best performing small caps over the next few years, which is why so much of my portfolio is allocated to the pet business’ shares.

I’m also confident that these top stocks will beat the market too.

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Motley Fool contributor Tristan Harrison owns shares of NATVETCARE FPO. 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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