$128b spent on pets

COME economic rain or shine, Americans spend $US60billion ($F128b) a year on their pets, a fact that has led investors to seek shelter in pet company shares when the stock market goes to the dogs.

The sector’s reputation as an all-weather investment may be vastly overstated, however.

Shares of companies that feed, groom, treat or pamper pets generally outperform the overall stock market during recessions and market routs, but that doesn’t mean they all do well.

Over the past year, for example, natural pet food companies Freshpet Inc (FRPT.O) and Blue Buffalo Pet Products Inc (BUFF.O) have nosedived as thin margins and competition have eaten into their profits despite the popularity of precious puppy food.

Freshpet is down 75.4 per cent from its April 2014 peak, while Blue Buffalo, which went public in July 2015, has seen its shares fall 43 per cent since then.

In the last recession, some stocks did well and some did not. While the S&P 500 was losing 57 per cent between October 2007 and March 2009, shares of online pet pharmacy PetMed Express Inc (PETS.O), animal health testing company Idexx Laboratories Inc (IDXX.O) and vaccine distributor Henry Schein Inc (HSIC.O) fell 7.1 per cent, 49.8 per cent and 45.5 per cent respectively.

So far this year, with the S&P down 10 per cent, PetMed, Idexx and Henry Schein have fallen 5.5 per cent, 7.6 per cent and 0.2 per cent respectively.

“The thing with the retail side is that it’s a much more competitive business, so you can get your dog food at a 100 different stores and they’re all trying to protect razor-thin margins,” said Jarl Ginsberg, portfolio manager of the Columbia Small and Mid Cap Value Fund in New York.

Mr Ginsberg’s fund owns about 912,000 shares in VCA Inc (WOOF.O), a company that runs animal hospitals.

The animal healthcare industry, with companies such as Henry Schein and Heska Corp (HSKA.O), a maker of animal lab testing products, has done better. Henry Schein is up 11 per cent in the past 12 months, while Heska is up 55 per cent.

These companies aren’t affected by the US policy debate on human healthcare spending, do not depend on payments from insurers and are also likely to do well because of recent strides in diagnostics, said William Bell, a portfolio manager at Atlanta Capital Management.

“The lifetime revenue per dog, if you’re doing every test that’s recommended, will be $US17,000 ($F36,456),” said Mr Bell. “Right now, the revenue per dog is $US3000 ($F6433) so there’s tremendous room for growth.”

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