The First Cut: Real Dogs: Pet-Care Stocks

    by John Bajkowski

    The First Cut: Real Dogs: Pet Care Stocks Splash image

    The First Cut is designed as a starting point for investors. Each issue we list the top 30 stocks that pass relatively simple screens of interest to individual stock pickers. AAII’s Stock Investor Pro screening software is used to generate the First Cut listing.

    Are the stocks of pet-care companies immune from a slowdown in consumer spending? That’s the perception of some investors. And while no one wants to own a dog stock, interest in stocks in the pet-care industry has increased.

    The pet industry itself is quickly growing. According to the American Pet Product Manufacturers Association (APPMA), 63% of U.S. households (71.1 million homes) own a pet, up from 56% 20 years ago. Pet-related sales are expected to go above $43 billion in 2008, nearly double the level just 10 years ago. And of the $43 billion pet spending total, $16.9 billion will go toward food, $10.9 billion for vet care, $10.3 billion for pet supplies and over-the-counter medicine, $3.2 billion for pet services such as grooming and boarding, and $2.1 billion for the actual live animal purchases.

    The First Cut filter for this issue is very basic: We screened for exchange-listed stocks with a tie to the pet industry. Some stocks, such as PetSmart and PetMed Express, are direct plays on the pet industry, while other stocks, such as Alpharma, develop drugs for humans and animals. Twenty stocks made the First Cut and they are ranked by their forward price-earnings ratio, which divides the current stock price by the consensus expected earnings for the company’s current fiscal year and provides a feeling for the expectations priced into these stocks. International Absorbents and Oil-Dri Corporation of America, both manufacturers of kitty litter, do not have any analyst coverage and were placed at the bottom of the list.

    A short-term picture of earnings stability and growth is provided through the display of annual earnings per share for each of the last two years along with the expected earnings for the current fiscal year. The historical earnings growth figure over the last five years gives a longer-term perspective of bottom-line growth, while the sales growth rate does the same with strength of the top line of the income statement.

    The market capitalization (share price times number of outstanding shares) indicates the size of the firm, with smaller firms having higher growth potential, but often higher risk. The price change figures for the last 52 and 13 weeks highlight long- and short-term stock performance.

    The significant price declines for many of these stocks over the last year highlight that the expected stock-market protection did not materialize for many of these of these stocks. While many consider pets more like family members, it awaits to be seen if investors will release these stocks out of the doghouse.


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