Big Profits in Declining Canine Health

Wall Street loves sick and dying dogs.  From FiercePharma:

Shares of animal health companies are outperforming the stock market as a whole, thanks largely to strong performances from companies like diagnostics maker IDEXX Laboratories ($IDXX), veterinary hospital chain VCA ($WOOF) and drugmaker Zoetis ($ZTS).

Those companies have helped drive stocks in the broad arena of pet care up 35% this year, while the Standard & Poor’s 500 has risen just 8.3%, according to Reuters. IDEXX and VCA have skyrocketed 50% and 31% respectively so far this year.

What’s fueling the love of animals on Wall Street is the growing profile of pets, particularly in American households, experts say. “What you see driving that growth is the humanization of pets and consumers' willingness to spend on their pets very heavily," Joe Edelstein, an analyst at Stephens, told Reuters. "Part of that is because pets are part of the family."

In the U.S., consumer spending on pets rose 5% on an inflation-adjusted basis in 2015, whereas consumer spending as a whole was up just 3.2%, according to statistics from the U.S. Bureau of Economic Analysis quoted by Reuters. It was the fourth year in a row that pet-related spending outpaced overall consumer expenditures.

But analysts and fund managers say it's important to weigh the performance of individual companies against their potential for future growth. VCA, for example, is trading at 22.6 times analysts’ estimates of what it might earn over the next year, according to Reuters. That’s higher than its 5-year median price-earnings ratio of 16.8, but might be considered a bargain compared to IDEXX, which is trading at 43 times estimates--its highest in two decades, according to Reuters.

Continued strong performance from animal health companies is encouraging some large investors to hold onto their stakes. "We continually look at our names, the results and our expectations, and as long as we think they warrant the multiple that we've paid for the stock, we're going to be owners," said Jarl Ginsberg, portfolio manager of the Columbia Small/Mid Cap Value Fund, in an interview with Reuters. The fund owns shares of VCA.

As for Zoetis, it hasn’t had quite as big a run-up this year as other animal health companies have, and some investors see that as a buying opportunity. "This is a company that should post 14% earnings growth over the 2013 to 2017 time frame," James Tierney, Jr., chief investment officer at money manager AB's Concentrated US Growth fund, told Reuters. "This is a time period where the broader market, meaning the S&P, has had modest growth, if any."