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Why I really like the pet industry stocks

Credit: Michael Gil

There are few industries where I can say I like most stocks in that area. The tech sector can be a bit hit and miss, I generally avoid all commodity businesses, although the healthcare is mostly good. I like the two main players on the ASX in the pet industry space.

Most readers will be aware of Greencross Limited (ASX: GXL), it’s the pet giant of Australia which owns the Greencross vet network and the Petbarn retail chain.

The other relatively major player is National Veterinary Care Ltd (ASX: NVL), although it is a lot smaller than Greencross. Most of National Vet Care’s business relates to veterinary clinics, but it also runs a management service for independent clinics.

Here are three reasons why I really like the pet industry:

Defensive earnings

As pet owners we are playing into the ‘humanisation’ of pets. That is, we are treating them as our children and not just animals we are co-living with. We’re more willing to keep our pets healthy and alive, which involves taking them to vet for regular check ups and also forking out for expensive treatments.

Approximately 79% of dogs go to the vet at least once a year and around two thirds of cats visit the vet annually. This is a good source of recurring earnings for businesses operating in the vet sector like Greencross and National Vet Care.

Greencross also benefits by being the main ‘pet supermarket’ of Australia. Pets need food, cat litter and other essentials every day of the year – which Petbarn provides.

Growing industry

The pet industry has grown by 42% since 2013 to $12 billion. Some of it is down to an increase of services such as pet grooming, pet insurance and other services. Another reason for the growth is that the pet population is growing alongside the human population.

There is an estimated 4.8 million dogs and 3.8 million cats in Australia, which represents household pet ownership of 62%.

If the pet businesses can continue growing prices, revenue and profit margins then they should both have promising long-term futures.

Growing market share

It’s one thing to be a part of an industry with a growing pie, it’s another thing to also own a larger slice of that pie.

Greencross and National Vet Care are both increasing their market share of the pet industry through organic growth and acquisitions of existing clinics.

National Vet Care has added seven clinics to its network since the start of FY18, which is an increase of 9%.

Greencross increased its number of vet clinics by 24 over the past year and opened 10 new Petbarns.

If they continue at this rate they will both be a lot bigger businesses in a few years than they are now.

Foolish takeaway

Greencross is currently trading at 14x FY18’s estimated earnings and National Vet Care is trading at around 23x FY18’s estimated earnings. I think both of these prices offer good long-term value for investors and I’m thinking of adding both to my portfolio at these prices

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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited and NATVETCARE FPO. 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 Scott Phillips.

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