Like Stable Growth? Buy These 2 Stocks in a Huge Market

Pet care stocks buy

Author: Tim Phillips

March 23, 2021

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When the global Covid-19 pandemic hit last year, many individuals in Western countries started to work remotely.

With long commuting times the bane of many peoples’ existence, it appears likely that a degree of “work from home” will last beyond the pandemic.

Regardless, there has certainly been a pickup in the movement of people into the suburbs as modern technology allows us to effectively work from our own homes.

This trend has been particularly prevalent among millennials and Gen Z in the US, with a recent survey by Cowen and Company (an investment firm) finding that 49% of Gen Z reported living in the suburbs in 2020 – up from 41% in 2019.

Forced out by prohibitively high real estate prices, in areas such as San Francisco and New York, these young people also want the usual things that come with life in the “burbs”.

This includes pets, a massive market that investors may not be aware of. With that, here are two pet care stocks that investors should consider buying for the long term.

1. Chewy

One of the leading pet care providers in the US is pet-focused e-commerce company Chewy Inc (NYSE: CHWY)

Chewy has managed to take significant market share from e-commerce behemoth Amazon.com Inc (NASDAQ: AMZN) as it gives its customers a wider range of pet-specific products on its platform.

These range from organic pet food to specialised toys and now even a telehealth service for pets – which allows customers to connect directly with licensed vets to get answers to commonly-asked questions on health and wellness.

All these niche services have seen Chewy grow an increasingly loyal user base, expanding by about 40% year-on-year to 17.8 million active customers in its latest quarter (for the 13 weeks ending 1 November 2020).

Not only that but Chewy’s gross margin and net profit margin are also continuing to improve (see below).

Chewy users

Source: Chewy’s Q3 fiscal year 2020 shareholder letter

With a stated growing focus on pet health and wellness, Chewy is looking to become a top-of-mind brand with pet owners for all the goods needed to keep their furry friends happy.

With its Autoship customers – a subscription shipping service that makes up about 70% of overall revenue – and a narrowing net loss, investors have a company that is set to benefit from the structural growth story in pet care spending.

2. IDEXX Laboratories

Second on the pet care list is IDEXX Laboratories Inc (NASDAQ: IDXX), a leading manufacturer and provider of diagnostic tests, equipment and services for the veterinary, livestock and poultry markets.

Ensuring our pets are well and taken care of when they fall sick has seen IDEXX, as the top global player, benefit from a big trend.

Demand for its veterinary diagnostics testing services has been strong throughout the pandemic (and before it, too).

Its key diagnostics division for pets is built on highly-visible recurring revenue, which has continued to see stable year-on-year growth ranging from the high single-digits to mid-teens percentage range – ever since 2010.

IDEXX saw fourth-quarter 2020 revenue growth of 19% year-on-year as it posted US$721 million in sales for the final three months of the year.

Even more impressively, earnings per share (EPS) for the whole of 2020 was US$6.71, up 37% year-on-year.

Buy the leaders

In the competitive pet care space, Chewy and IDEXX are two of the leaders in their respective spaces.

With pet care seen as a “recession-proof” industry (many studies find that pet care spending is not discretionary but necessary for many households), these two are set to continue to benefit for years to come.

Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Chewy Inc.

About the Author: 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. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.