Pet Care Spotlights: Three Companies that Excite us
The pet care theme is unlike any other theme. Underpinned by strong secular demand dynamics and price inelasticity, this megatrend owes itself to an innate change in our culture and demographics. We love our pets. And this is not going to change any time soon.
Much was made of pet ownership during the Coronavirus pandemic. While the lockdowns certainly accelerated pet ownership, research shows that household formation among Millennials and Gen Z consumers is likely to sustain it.[1] After all, pets are a long-term commitment.
According to Morgan Stanley, pet ownership is expected to rise by 14% over the next 10 years. In addition, 65% of 18- to 34-year-olds are planning to acquire or add a pet over the next 5 years. These new pet owners are also spending more on their pets compared to their elders. Household spending per-pet is expected to grow from $USD 980 in 2020 to $USD 1,292 by 2025 and then jump to $USD 1,909 by 2030.[2]
The various forces driving the pet industry – from changing demographics, increasing humanisation of pets, premiumisation in pet products and services to animal health and sustainability – mean that the pet sector today has more tailwinds than ever before in history. And yet, we can observe that this is just a continuation of an already stellar track record.[3]
Consider that, in the United States, the pet care industry has grown every year between 1994 and 2021 – including during the aftermath of the Dotcom Bubble, the Global Financial Crisis, the Taper Tantrum and the Coronavirus Pandemic. In other words, little has been able to slow our desire to adopt and care for pets. Moreover, we have more pets in the world today than ever before in human history. We believe this presents an optimistic outlook for the pet care sector. In this piece, we unpack three of our favourite companies with leadership potential in the global pet economy.
Number 1: Freshpet
Our first company is Freshpet Inc (“Freshpet”).
Freshpet specialises in the manufacture and sale of “human-grade” pet food. The company’s mission is rooted in the understanding that “our dogs and cats deserve real, fresh food in order to help them live their best, happiest, tail-wagging lives”.[4]
Freshpet’s food products use wholesome and fresh ingredients, cooked without preservatives and kept refrigerated “where meats belong”.[5]
Together with Freshpet’s focus on premium pet food including the use of sustainably sourced ingredients, it is easy to see why Freshpet’s product offering is winning with consumers. At the time of writing, Freshpet has an 82.4% analyst consensus ‘Buy’ rating.[6] In 2021 there were 23,631 Freshpet Fridge store locations worldwide, up from 22,716 in the previous year.[7] And this year, in the face of rising input-cost inflation, management still expects to add another 1,300 driven by increased media spending and capacity investments to support longer-term growth.[8] This might have something to do with its latest earnings results where, thanks to significantly strong first quarter sales up 42% from the previous year, it declared 2022 Q1 EBITDA of $USD 5.1m against consensus analyst expectations of just $USD 0.7m – a 559% earnings surprise![9]
Freshpet is part of a new wave of companies that represent the global shift toward greater humanisation. Pet humanisation occurs where pet owners begin to treat their pets increasingly like their own children as they observe habits that are similar to their own. Today, many more pet parents are choosing products for their pets that are remarkably similar to those they choose for themselves. According to Euromonitor International (“Euromonitor”), our thematic research partners for the pet economy, pet humanisation is a theme that is here to stay particularly across developed markets.
Number 2: Rover
Our second company is Rover Group Inc (“Rover”).
Rover seeks to “connect dog and cat parents with loving pet sitters and dog walkers in neighborhoods across the US, Canada, the UK and Europe”.
Rover operates an online marketplace where individuals can buy and sell pet care services such as grooming, day care including dog walking and pet hotel services. The company earns a commission of roughly 20% on each transaction and claims to have over 42 million services booked through its platform.[10]
The digitisation of all our industries has certainly not skipped over pet care. Rover is well placed to benefit as more pet care purchases of goods and services are moved online. Worldwide pet ecommerce revenues have increased each consecutive year since 2015 and are estimated to reach nearly 30% penetration by 2025. Between 2000 and 2025 that’s a CAGR of 9%.[11]
At the time of writing, Rover has an analyst consensus buy rating of 85.7%[12] and its latest Q1 2022 results showed first quarter revenue of $USD 27.8 million, up 128% from the same period last year and above analyst projections of $USD 26.5 million. It also announced 179,000 new bookings on its platform, up 76% from the first quarter last year, illustrating strong performance despite the impact of the pandemic. In terms of full year guidance, Rover expects revenue of $USD 41-43 million which would equate to roughly a 72% year-on-year increase[13].
Rover is a stellar example of a company benefiting not only from the relentless rise of ecommerce but also the expanding global pet care industry. It’s also a story of convenience. Just like Uber revolutionised how we hail a ride or how Ebay paved the way for the circular shopping revolution, Rover offers a new solution for pet owners to exchange services quickly and easily through the convenience and usability of an online platform.
Number 3: Elanco Animal Health
Our final company is Elanco Animal Health Inc (“Elanco”).
Elanco is a market leader in developing innovative products and solutions that enhance animal health, “empowering the people that raise and care for animals”.[14]
Elanco offers disease prevention products, such as parasiticide and vaccines that protect pets from worms, fleas and ticks. It also provides therapeutic solutions for pets that treat pain and prevent disease, enhance and extend quality of life and improve the type of care that pets receive.
Elanco is part of a range of businesses that are primarily involved in pet health-related products and services. Owing to the humanisation trend we have previously discussed, people are becoming increasingly concerned over the health of their pets and this is driving the convergence between expenditure on personal healthcare and pet healthcare. Furthermore, Elanco claim pets are living up to 20% longer which is a positive tailwind for the sector[15].
Elanco is well poised for growth and has continued to innovate. It is expected to announce seven new products in 2022 and between five and seven regulatory submissions. The latter includes two potential ‘pet blockbusters’ for the parasiticides and dermatology markets[16].
The company published its Q1 2022 earnings in April with adjusted net income coming in at $USD 177.0 million versus $USD 171.3 million analyst consensus estimates.[17] Analysts had previously questioned whether Elanco’s companion-animal-health segment could achieve double digital growth rates in line with competitors in private markets such as Bimeda, Merck Animal Health and Huvepharma. However, whilst management guidance suggests single-digit revenue growth for 2022, productivity and synergies resulting from the acquisition of Bayer’s animal health business in 2020[18] is expected to offset inflation and expand margins. This could generate 10% adjusted EBITA growth and guidance points to an EPS target between $USD 1.18 and $USD 1.24 – reflecting potential growth of around 12% from the 2021 year end EPS figure of $USD 1.05[19].
Related ETF
PETZ: Rize Pet Care UCITS ETF
References
[1] AlphaWise 2020
[2] Morgan Stanley 2020
[3] American Pet Products Association, 2021
[4] Freshpet, Why Freshpet, May 2022. Available at https://freshpet.com/en-gb/why-freshpet/
[5] Freshpet, Why Freshpet, May 2022. Available at https://freshpet.com/en-gb/why-freshpet/
[6] Bloomberg, 09 May 2022
[7] Statista, Number of Freshpet Fridge store locations worldwide from 2012 to 2021, April 2022. Available at https://www.statista.com/statistics/1106695/freshpet-fridge-store-worldwide/
[8] Freshpet, Q1 2022 Earnings Call Presentation, May 2022. Available at: https://s21.q4cdn.com/902450038/files/doc_financials/2022/q1/Q1-2022-Earnings-Call-Presentation-Final-equity-raise.pdf
[9] Bloomberg, May 2022
[10] Rover, About Rover, May 2022. Available at: https://www.rover.com/uk/about-us/
[11] Edge by Ascential, December 2020
[12] Bloomberg, April 2022
[13] Rover, “Rover Reports First Quarter Financial Results”, May 2022. Available at: https://investors.rover.com/news-releases/news-release-details/rover-reports-first-quarter-financial-results
[14] Elanco, Products & Services, May 2022. Available at: https://www.elanco.com/en-us/products-and-services
[15] Elanco, 2022 Q1 Earnings, “Animal Health Industry Well -Positioned in Today’s Environment “ May 2022. Available at: https://s1.q4cdn.com/466533431/files/doc_financials/2022/q1/Q1-2022_Earnings-Slides_vF.pdf
[16] Elanco, 2022 Q1 Earnings “Progress and Actions for Elanco’s Next Era of Growth”, May 2022. Available at: https://s1.q4cdn.com/466533431/files/doc_financials/2022/q1/Q1-2022_Earnings-Slides_vF.pdf
[17] Bloomberg, April 2022.
[18] Bayer, August 2020, “Bayer completes the sale of its Animal Health business unit to Elanco.” Available at: https://media.bayer.com/baynews/baynews.nsf/ID/Bayer-completes-the-sale-of-its-Animal-Health-business-unit-to-Elanco
[19] Elanco, 2022 Q1 Earnings, “Financial Guidance” May 2022. Available at: https://s1.q4cdn.com/466533431/files/doc_financials/2022/q1/Q1-2022_Earnings-Slides_vF.pdf
