Here’s Why This Pet Insurance Stock is a Strong Buy

November 3, 2020

Uncover - Trupanion stock pet

Shares of Trupanion Inc (NASDAQ: TRUP), an online pet insurance firm, climbed 9.3% as the company announced two acquisitions. Should long-term investors have a look at the stock?

Tim’s Take:

The pet market occupies a rather obscure space in the investment market. But it shouldn’t.

Pet care is big business. The market for pet care in the US was valued at US$223 billion in 2019 and it’s forecast to grow at a compound annual growth rate (CAGR) of 5.9% from 2020 through 2026. 

And for anyone who has a pet, peace of mind for those hefty medical bills is something that is increasingly in demand.

For those who want to buy pet insurance in North America, Trupanion is the leader in the market. Admittedly, it’s a small but fast-growing market.

Only around 1-2% of the 180 million pets in the US and Canada are covered by pet insurance. Compare this to somewhere like the UK (25%) and Sweden (40%) and it’s clear what the market opportunity is like over the long term.

As for Trupanion’s latest acquisitions, there wasn’t much disclosed to investors by the company besides the fact that there are two deals totaling around US$48.2 million. One is of an unaffiliated software company and the other was a purchase of assets.

This was most likely due to competitive concerns but investors can probably expect more details when the company reports its fourth-quarter earnings early next year.

Pets and subscription

Trupanion has done so well because its offerings are highly competitive and also reduces friction for customers. 

This is because reimbursements for Trupanion policies can be immediate via the firm’s direct integration with a large majority of veterinary doctors and their payment systems.

What’s more, the firm has an impressive track record of revenue growth having expanded its top line by at least 20% for 52 quarters in a row.

Add this to its subscription model, which provides highly consistent and predictable revenue streams, and investors can tap into a multi-year growth trend.

Trupanion revenue

Source: Trupanion Q3 2020 earnings presentation

Trupanion’s latest quarterly earnings was a continuation of this trend. Revenue was up 31% year-on-year to US$130.1 million.

Even better, the company was operating cash flow and free cash flow positive in the third quarter – notching up figures of US$9.8 million and US$8.5 million, respectively.

With a market cap of just US$2.8 billion, Trupanion has the potential to generate significant long-term returns for patient investors who believe in the growth of the “recession-resistant” pet care market.

Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.

This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.

This material is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CGS-CIMB’s clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this material. The information and opinions in this material are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, derivative contracts, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto. CGS-CIMB have not, and will not accept any obligation to check or ensure the adequacy, accuracy, completeness, reliability or fairness of any information and opinion contained in this material. CGS-CIMB shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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