How to invest in the booming pet industry

US News & World Report
Coryanne Hicks
Key Points
  • Pet care is a $100 billion industry and booming, and investors are taking notice.
  • Without any available pet industry exchange-traded funds, investors have to cherry pick their own stocks.
  • Both pet food and pet health care make up large portions of spending, while apps geared toward pet owners also have potential.
SG Hirst | Getty Images

Americans will spend more than $70 billion on their pets in 2018, according to the American Pet Products Association. Globally, pet care is a $100 billion industry and growing.

"The pet industry is booming," writes JJ Kinahan, chief strategist at TD Ameritrade, in an email. We spend as much on our pets' care as we do on our own – or on our kids.

Pets are taking on the role of children for many Americans, says Patrick Watson, senior editor at Mauldin Economics. This is particularly true for millennials, who are delaying marriage and having fewer kids. As pet owners increasingly humanize their pets, "they're more willing to spend money on things like premium pet care and food products," Kinahan says.

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Pet owners aren't going to stop spending on their pets just because money is tight. They don't view these costs as "discretionary spending," and "are willing to give up other expenses to cater to their pets," says Jodi Burrows, vice president of SDR Ventures, which has provided advisory and private capital formation services to the pet industry.

"This translates to an industry that will continue to do well even if the economy weakens," Watson says. The industry isn't immune to market pullbacks, but downturns will be less severe and shorter lived than for other industries, he says.

Investors large and small recognize this. Between 2012 and 2016, venture capitalists invested nearly $500 million in pet technology alone, according to CB Insights. This influx of venture capital shows "there's continued innovation and interest from large and small players alike in pet care," says Ben Jacobs, head of ventures for global pet industry leader Mars Petcare. Mars recently launched the first pet care-oriented venture capital firm, aptly named Companion Fund.

Robot pets are changing the lives of the elderly and disabled
Robot pets are changing the lives of the elderly and disabled

Investors looking for long-term growth opportunities would do well to consider pet care. But investing in the pet industry is easier said than done. There are no pet industry exchange-traded funds (although a couple are in the works at ProShares and Gabelli NextShares), which means cherry-picking your own stocks.

How to choose a pet care stock. The same rules apply when choosing pet care stocks as any other investment, Watson says. You want a stable company with a strong track record and products that have far-reaching distribution because pet owners shop at brick-and-mortar retailers and online.

It should also have manageable debt levels and a profit margin of at least 10 percent, he says. "I'd try to find companies run by people who are animal lovers," he says. So "that to them, it's not just a business; it's their passion."

Look for companies with products or services that address a "particular pain point for pet owners" or care providers, Jacobs says. "There's a lot of me-too innovation." The long-standing winners, he says, will be those that have a "defensible" offering.

To determine where the broader industry is headed, Jacobs suggests looking at where venture capitalists are investing. Many venture capital firms (Companion Fund included) make their portfolios publicly available.

Why General Mills bet on pets
Why General Mills bet on pets

With those parameters in mind, here are some segments of the pet industry experts and venture capitalists agree are areas to watch.

It's chow time. More than 40 percent of pet-related spending goes to pet food. "Take a stroll through any pet store and the proliferation of brands and flavors of pet food is amazing," writes Kim Forrest, vice president and senior portfolio manager at Fort Pitt Capital Group, in an email.

The pet aisle is becoming more popular than the middle of the grocery store where packaged foods reside. Consumers don't want Kraft Mac & Cheese; they want organic cat food and dog food with seven ingredients or less. "As health and wellness grows in priority to consumers, these trends are quickly transferring to the pet market," Burrows says.

Even human food manufacturers are buying into the pet industry. Big names like General Mills and JM Smucker Co. recently acquired pet food subsidiaries.

Investors can gain pet food exposure through General Mills and Smucker, but these won't have as much pet industry exposure as a pure play in pet companies, Kinahan says. For that, you want a company like all-natural pet food and treat provider FreshPet, Watson says.

Pet health is big business. Millennials, who make up the majority of pet owners, expect to spend more on their cat or dog's health care than their own, according to TD Ameritrade's study "Millennials and Their Fur Babies."

Health care is one of the most defensive segments of the pet industry. Pet owners might switch to generic dog food during a recession, but they won't skip taking Bowser to the vet if he gets sick. Pet medicine and vaccines were close to a $15 billion market in 2017, writes Mason Williams, chief investment officer at Coral Gables Trust Co., in an email.

"People are spending big bucks on pet health care," Forrest says. Her firm invests in Zoetis, the world's largest provider of pet medicine and vaccines. "The company is looking really interesting given its growth and recent acquisition of Abaxis," a provider of veterinary technology, Forrest says.

The online pet pharmacy PetMed Express is another popular pick. It often sells medicines for less than what the vet charges, Watson says.

Then there's Idexx Laboratories. The $2 billion company is a leading global provider of in-clinic laboratory analyzers for pets. Its companion animal group division concentrates "on areas such as diagnostic imaging and software systems" for veterinarians, Williams says.

Or you could get exposure to the health industry through a pet health insurance provider like Trupanion, Watson says, but investors will have to be patient. The pet insurer is still struggling to turn a profit, though its business is growing.

Trupanion's revenue increased in each of the past six years, from $55.5 million in 2012 to $242.7 million in 2017, and the number of enrolled pets quadrupled over the same period. Five of seven analysts rate Trupanion a "strong buy," along with one "buy" and one "hold," according to Nasdaq.

Apps have potential. The only thing millennials love almost as much as their pets is technology. They "expect data and technology to optimize their lives," including pet ownership, Jacobs says.

"We're seeing innovative new ways that companies are providing goods and services, such as dog food subscriptions and apps to easily hire a dog walker," Kinahan says. Most of these apps are private companies or startups, but this could change. Companion Fund certainly hopes some of the startups it funds will go public, Jacobs says.

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