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For pandemic investors Year of the Dog offers opportunity

People have turned to pets for relief from the hard realities of COVID-19. Here are some animal health stocks benefiting from the trend.

Animal welfare organizations from coast to coast have seen a surge in demand for pet adoptions as Canadians spend more time at home during the pandemic and opt for the comfort of animal companionship.

Dogs and cats have provided a distraction from the hard realities of COVID-19. Dogs offer a reason to leave the home office for a while and stretch your legs as the Globe & Mail noted in a two-page feature on The Year of the Dog this weekend.

For investors, pets and livestock healthcare offers another way to look at the trend. It is growing strongly, has solid fundamentals and committed customers.

Kristin Peck, chief executive of New-Jersey-based Zoetis Inc., (NYSE:ZTS) the largest pure animal pharma company, said as much in a recent conference call. She noted that animal health is a “steady and reliable sector,” even in times of economic hardship.

“No matter where you sit, everyone has a new dog or cat in your neighborhood,” she said.

Ms. Peck said people are spending  more time with their pets this year and have become more aware of their pets’ health, picking up on previously unnoticed ailments and anxieties. Such things as itches, skin rashes and general pain and discomfort. So more people are visiting vets with spending per visit increasing at a double-digit rate in the U.S., she said.

“We see that as a global trend.”

Dr. Ian Sandler, chief executive of Greywolf Animal Heath Inc., a Toronto company providing pharma products to veterinary clinics agrees with her hypothesis.

 “We’ve seen many shelters empty this year, primarily of dogs but cats as well.  It’s been really amazing,” he says.

Dr. Sandler,  who speaks on behalf of the Canadian Veterinary Medical Association, said pet adoptions boomed as the spring lockdown began. With March Break and summer holidays plans on hold, people toying with pet adoption took the plunge.

Sales of drugs for farm animals have been hurt more by the pandemic than those for companion animals. Credit: Zoetis Inc.

 “For so many people who have been alone in this difficult time, pets have really been  a godsend,” Dr. Sandler says.

Zoetis makes medicines, vaccines and diagnostic products for livestock and farm animals as well as companion animals. It was spun off in 2013 by Pfizer Inc. and has annual revenues of about US$6.5 billion.  

Ms. Peck noted in the conference call that companion animal revenues in its latest quarter rose 20 per cent operationally. Livestock products, hurt more by the pandemic, rose 9 per cent. Quarterly revenues rose 13 per cent year-over year to $1.8 billion and net income of $479 million was 11 per cent higher.

Investors have bet that the trends will stick. They have pushed Zoetis’ share price up 23.6 per cent year-to-date to US $163.69. The dividend yield is a modest 0.49 per cent and the price to earnings ratio a lofty 42.1.

So does that make it a good investment?

Paul MacDonald, chief investment officer at Harvest Portfolios Group in Oakville, Ont., says Zoetis has consistently hit high notes in terms of growth and business plan execution.

He says Americans spent US $95.8 billion on their pets in 2019, 5.7 per cent more than a year earlier, according to the American Pet Products Association. That includes the purchase of animals, as well as food, grooming and vet spending.  

“Pets are important to people,” says Mr. MacDonald, who owns a Labrador Retreiver.

Mr. MacDonald says pet spending will spike this year. While there are no hard figures, there is plenty of evidence. He says net American pet adoptions were rising on average by 30,000 a year for a few years prior to 2020.  If you extrapolate, this year will be almost nine times higher at 261,000.

He cites research by New York-based data and market measurement firm Nielsen Co. LLC,  showing sales of leashes, collars and dog houses soaring. Quarter-over-quarter, leash sales rose 16 per cent between April and June, followed by another 13 per cent in the summer and 15 per cent more in the fall.

Zoetis is the third-largest holding in the Harvest Healthcare Leaders Income ETF (TSX:HHL), an exchange-traded fund that holds a portfolio of 20 of the largest global healthcare companies.

“We’ve liked Zoetis for a while,” Mr. MacDonald says. “It’s not exactly what you might think of in a healthcare fund, but it adds diversification and is best in class.”

Zoetis has a history of strong relationships with its customers and offers many leading brands among vaccines, parasite and dermatology products, he says.

There are a couple of other large players in the animal health care space that investors could consider.

Elanco Animal Health Inc. (ELAN-N), which was spun off from Eli Lilly & Co. in 2019, is the second-largest company next to Zoetis. It closed the US$6.89-billion purchase of Bayer Animal Health in August. The combined firms have sales of about US$5-billion annually.

Merck & Co. Inc. (MRK-N) operates its animal health business as a division within the larger company. It generates US$4.4-billion a year in sales, or about 10 per cent of Merck’s revenue.

Dr. Sandler says pets and people are helping each other get through the pandemic. He says people have to be mindful that from a pet’s perspective what were once quiet weekdays at home are now filled with families and that can cause stress.

“What’s important is that the pandemic has created an incredible opportunity for people to interact with the pets. And for many people that companionship has been extremely important.”

 This is an expanded version of an that article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Dec. 14, 2020.

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