Pet ownership increased in 2020 and 2021, resulting in bumper profits for companies like Pets at Home and IDEXX Laboratories. While rising costs are likely to put pressure on pet care stocks, the sector is often considered recession-proof.
More than 50% of UK households, and 70% of US households, now own a pet – meaning names like Pets at Home [PETS.L] and IDEXX Laboratories [IDXX] have seen a growing market of four-legged friends to tap into. In the UK alone, more than 3 million new pets were acquired during the coronavirus pandemic, propelled by lockdowns and the work-from-home trend.
Like other sectors, pet care is experiencing macroeconomic pressures, including rising costs and inflation, supply chain problems and an increasingly squeezed customer base. The Rize Pet Care UCITS ETF [PETZ.L], which holds both IDEXX and Pets at Home, has fallen 19% since its launch on 1 April (through to 23 August).
However, pet care has a reputation for being recession-proof – with owners still compelled to buy essentials such as pet food for their beloved furry companions, even in tough times.
Pandemic boom continues for Pets at Home
Pets at Home has been thriving of late. Last year, the UK company added an impressive 1.1 million customers. Other wins in 2021 included a 48% yearly increase in signups to its Puppy & Kitten Club and £120m in annual customer subscriptions. For the year to the end of March, it recorded a 65.3% rise in pre-tax profits to £144.7m, with store sales rising 15.8% year-over-year to £984m.
The London-listed company has continued to see strong sales. It reported positive first-quarter results at the start of August, with revenues up 6% year-over year to £404.7m. It has forecast full-year 2022 pre-tax profits of between £127m and £136m.
Lyssa McGowan, CEO of Pets at Home, told analysts a change in pandemic lifestyles had also increased demand for its vet services segment, with revenues up 11.2% in the 16 weeks to 21 July.
Despite strong performance, the Pets at Home share price is down 26.3% year-to-date as of 23 August. Rising costs are expected to start eating away at profits. In May, the company warned it is “not immune to current industry-wide inflationary pressures”.
However, Hargreaves Lansdown analyst Matt Britzman wrote in a note following the earnings call that the company’s “overall model is attractive” and its ability to cross-sell in its core retail arm is its “biggest unique selling point”. While Britzman noted that inflation is an obvious headwind, he said it is “being managed well so far” and pointed out that UK pet ownership is still strong, which should benefit demand for some time to come.
At MarketBeat, seven analysts rate Pets at Home stock a ‘moderate buy’, with a target price of 451.67p, representing a 38.4% upside from its 23 August closing price of 326.4p. Analysts at Jefferies rated the company a ‘buy’ on 10 August, highlighting the company’s “resilience and growth”.
They also weighed in on the general theme: “Looking ahead, we see the pet care market as fundamentally attractive, largely immune to the consumer cycle and… set to grow at 4-5% in the medium term”.
IDEXX Laboratories slumps but vet spend remains high
US firm IDEXX offers diagnostic innovations for pets and veterinary practices. Although it is a key player in the veterinary care market, the IDEXX share price has suffered a larger slump than its peers, crashing year-to-date by 45.8% as of 23 August. According to Zacks Equity Research, the reasons include the company’s high dependency on third-party distributors and currency fluctuations.
At its second quarter earnings, in early August, IDEXX reported revenues of $861m, an increase of 4% year-over-year, but missing the consensus forecast of $864.61m. Earnings per share were $1.58, a decrease of 30% year-over-year and missing the consensus forecast of $1.65. The company reported $80m of discrete R&D investment and operating expense growth had piled pressure on its bottom line.
The analyst outlook remains mixed for the stock: The Wall Street Journal reports that of 12 analysts giving a rating, five recommend to ‘buy’ and four to ‘hold’, with a consensus ‘overweight’ rating.
While IDEXX has received several analyst downgrades in recent weeks, there are still some reasons to be optimistic. Barclays analyst Balaji Prasad lowered his price target from $700 to $582 earlier this month but retained an ‘overweight’ rating on the stock. He noted that spending on vet visits is rising, but recovery is likely to be gradual due to labour shortages.
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