The Private Equity for Families Blog

The Economy Has Gone To The Dogs

I am sure all of you have noticed man’s best friend is one of the most popular trades during the Pandemic. My brother’s family now has four dogs. My sister has three. My daughters have multiple pets.  Research shows Gen Z and the Millennial cohorts are buying up pets as fast as real estate is selling in Cleveland. The only group that is not is the aging baby boomers who, like the McCreary family, have decided that pets are too big a responsibility and way too expensive for a fixed income. Here is an excerpt from The American Veterinary Association describing the explosion of pet ownership during the pandemic:

The American Pet Products Association reported in its latest “COVID-19 Pulse Study” that 11.38 million U.S. households have gotten a new pet during the pandemic. Furthermore, the human-animal bond remains strong, with 3 out of 4 pet owners saying that spending time with a dog, cat or another animal species helps reduce their stress and increases their sense of well-being during COVID-19.

Pet Markets Have Their Own “FANGS

Pet ownership may be easier to understand than the stock market, but its popularity with the masses has similar characteristics:

  • Getting a dog or cat is usually pretty easy and many pets are free just like trading on Robinhood
  • Pets have a high ESG score except for cows producing methane
  • Average monthly budget outlays for dogs ($450) and cats ($53) are like monthly interest on your margin account
  • RTW (return to work) will be harder on pet management than WFH
  • Time for day trading and pet care will likely decline at the same rate
  • The high-end pet market has its own set of “fangs” with Labrador Retrievers, Golden Retrievers, German Shepherds, Goldendoodles and Chihuahuas being popular holdings
  • Puppy mills with low barriers to entry will thrive
  • Inflation will make the monthly cost of pet ownership start to feel like a variable rate second mortgage
  • Like getting rid of grandma, exiting your pet “fang” positions will be nearly impossible

Equity Research Expects Big Growth

Whether the popularity of pet ownership is at risk apparently is not in doubt for equity analysts from various firms following that industry. Take the company ZOETIS (ZTS, NYSE). According to equity research from Raymond James published on May 6, 2021, this worldwide leader in commercial and consumer medical products for animals is currently trading at 25x projected EBITDA.

According to Raymond James, it is expected to have slightly more than $7.5 billion of 2021(E) revenues divided into two segments: $3.04 billion for “Livestock” medical products, and $4.45 billion of medical products for “Companion Animals” like dogs, cats and horses. The biggest growth market is the USA, but China pet ownership is thriving. 

Raymond James projects that ZTS “Companion Animal” revenues will grow to $6.5 billion by 2025, while livestock revenues will remain flat. The compound average revenue growth rate on the meds for pets segment is 9.9%. The same period projected CAGR for net income is even higher.

But These Products Are Expensive

Even though the world is awash in liquidity and pet ownership is a logical antidote to the stress of Covid-19 isolation and WFH, we are not talking about pet food, toys, collars and chews. These are dermatological, anti infective, and pharmaceutical products as well as vaccines and animal health diagnostics.  Liquidity has fueled the pet trade, but can it really sustain a 10% growth rate for dog, cat and horse meds?

Add Some Betta To Your Portfolio

I consulted my 11-year-old granddaughter about the pet ownership and care market. She wants to be a veterinarian, and her family has beagles and she knows they are really expensive. Day care, food, grooming, flea and tick meds, pet treats and toys all add up. I asked her for some advice for new owners who may find the cost of pet ownership in an inflationary environment is a backbreaking discretionary expense.

She recommends getting a Betta fish, which is a Japanese breed that only has to be fed once a month and sleeps most of the time. No meds, collars, toys, or treats and they are perfectly happy if you return to work. Monthly cost of ownership is probably under $5.00 including aquarium upgrades. Her father closed the circle for his daughter by explaining that Betta fish, like some of his favorite value stocks, also have a very low Beta.

Betta fish soon may become a popular RTW trade on Reddit, possibly combined with a paired strategy of shorting numerous cats and dogs found in all corners of the stock market.

The above commentary is for informational purposes only.  Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments based on conditions at the time of writing and are subject to change without notice.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

Private Equity for Families Blog | CapitalWorks Private Equity Cleveland Ohio

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