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Nicholas Kitonyi
Nicholas Kitonyi
Articles (362)  | Author's Website |

2 Picks in Growing Pet Industry

VCA and Trupanion have interesting growth propositions

January 30, 2016 | About:

The share price of VCA Inc. (WOOF) is currently on a rebound following an unexpected plunge that took the stock to a new 15-month low of $45 per share two weeks ago. Right now, VCA’s stock is trading at about $50 per share, which means it has gained more than 11% since recovering from that decline.

As such, some investors would be wondering whether or not it is too late to catch the tide.

VCA is an animal healthcare company with operations in the U.S. and Canada. The company operates through the animal hospital and laboratory business segments. Some of the company’s services include surgical services, oncology, and neurology. VCA also sells various retail and pharmaceutical products related to pets including food, flea collars and sprays, among others.

The pet industry has been growing over the last few decades with pets increasingly becoming an integral part of many families. Some of the leading business segments in the pet industry include pet food, healthcare, and insurance. The overall pet industry reached $75 billion in 2014, with online purchases of products and services growing by 38%. The industry is expected to maintain a CAGR of higher than single-digits over the next few years.

This means that companies operating in the industry have a compelling future including those operating in the services category, like insurance services.

For instance, NYSE-traded Trupanion (NASDAQ:TRUP) offers an interesting opportunity in the insurance segment. The company has been expanding its footprint lately, which could lead to revenue growth and eventually profits.

Trupanion recently revealed that it had signed a partnership agreement with the privately held PetPartners LLC, which is one of the largest players in freestanding veterinary hospitals. Lance Sprinkle, Pet Partners' COO and co-founder, said that the partnership was good for both companies.

"This partnership with Trupanion will ensure that all the clients within our family of veterinary hospitals have access to unrivaled medical coverage, so they can focus on their pet's recovery and not the financial stress."

Trupanion operates as a direct-to-consumer monthly subscription service provider of a medical insurance plan for cats and dogs primarily in North America. As such, this is a crucial partnership deal that could see it put several pets under its premium insurance cover. Some of its insurance plans offerings include a monthly premium quote for lower coverage and a comprehensive coverage program as illustrated in this pet insurance comparison chart.

Trupanion’s recent quarter revenue for the period ended Sept. 30 grew by 24.90%. Its next quarterly report will be released on Feb. 11. Analysts expect it to report revenue of $40.5 million for the holiday quarter, while projections stand at about $147.3 million for the fiscal year 2015, which is near $10 million more than its current trailing 12-month revenue of $138 million.

Trupanion is a small cap stock with an interesting value proposition from a growth perspective. It looks like a good stock to add to your portfolio after conducting further analysis. With pet related illnesses on the rise including diabetes, pet insurance looks to be a very lucrative business segment in the pet industry.

However, for those who are mindful with owning small cap stocks, VCA offers the best opportunity. It is a mid-cap stock and the largest in the pet industry with a market capitalization of about $4 billion.

VCA is a profitable stock, which looks set to report record profits and income for the fiscal year 2015. Analysts predict that VCA will report revenue of about $2.13 billion and EPS of about $2.33. This compares to $1.9 billion revenues and $1.56 EPS reported last year for fiscal 2014. 

The company currently operates at a margin of 14.92%, which compares to the industry average of 7%.

VCA currently trades at a P/E multiple of 23x, which is slightly unfavorable from a valuation perspective when compared to the industry average of 19.83. However, its Dec. 31, 2016 forward earnings P/E multiple of 18.88 suggests that there is room to run for the next few quarters as earnings continue to improve.

On the other hand, Trupanion is currently not profitable, which means the best way to assess its valuation would be through the P/S multiple. Its P/S ratio currently stands at 1.64x, which is slightly better than the industry average of 1.68x. The company’s gross margin of 30% is also better than that of the aggregated pet insurance segment of about 25%, but trails that of the overall pet industry at 47%.

Conclusion

The bottom line is that the pet industry is growing at reasonable rates in terms of spending. There are not many publicly traded companies that investors can use to invest in this market, despite already having reached $75 billion.

VCA is the largest company at the moment and according to analysts, it is set to book record revenues and profits for the sixth successive year. That shows that the company is still growing. On the other hand, Trupanion is the only publicly traded (main exchanges) stock that specializes specifically in pet insurance.

The company is currently adding partnerships to its portfolio that will only help it generate more revenues as it looks to book profits in the near future. This is a stock that offers massive opportunity for growth, especially for investors who are growth and value-oriented.

About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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