Are Pets at Home and IDEXX Pet Care Stocks Recession Proof?

Pand ownership increased in 2020 and 2021, leading to windfall profits for companies like Pets at Home and IDEXX Laboratories. While rising costs are likely to put pressure on pet care stocks, the sector is often seen as recession-proof.

Over 50% of UK households and 70% of US households now own a pet, meaning names like Pets at Home. [PETS.L] and IDEXX Laboratories [IDXX] have seen a growing market of four-legged friends to tap into. In the UK alone, more than 3 million new pets have been acquired during the coronavirus pandemic, propelled by lockdowns and the work-from-home trend.

Like other industries, pet care is facing macro-economic pressures including rising costs and inflation, supply chain issues and a shrinking customer base. The Rize Pet Care UCITS ETF [PETZ.L]which owns both IDEXX and Pets at Home, has fallen 19% since its April 1 launch (through August 23).

However, pet care has a reputation for being recession proof – with owners still having to buy essentials such as pet food for their beloved furry companions. , even in difficult times.

The pandemic boom continues for Pets at Home

Pets at Home has been booming lately. Last year, the British company added 1.1 million customers. Other wins in 2021 include a 48% annual increase in registrations for its Puppy & Kitten Club and £120million in annual customer subscriptions. For the year to the end of March, it recorded a 65.3% rise in pre-tax profit to £144.7million, with store sales rising 15.8% year-on-year another at £984million.

The London-listed company continued to record strong sales. It reported positive first quarter results in early August, with revenue up 6% year-on-year to £404.7m. It has forecast pre-tax profits for the year 2022 of between £127m and £136m.

Lyssa McGowan, CEO of Pets at Home, told analysts that a change in pandemic lifestyles had also increased demand for its veterinary services segment, with revenue up 11.2% in the 16 weeks. prior to July 21.

Despite strong performance, Pets at Home’s stock price is down 26.3% year-to-date to Aug. 23. Rising costs should start eating away at profits. In May, the company warned that it was “not immune to current industry-wide inflationary pressures.”

However, Hargreaves Lansdown analyst Matt Britzman wrote in a note following the earnings call that the “overall business model is attractive” and its ability to cross-sell in its main retail arm is its “biggest single selling point”. While Britzman noted that inflation is an obvious headwind, he said it was “well managed so far” and pointed out that pet ownership in the UK is still strong, which which should benefit demand for some time to come.

At MarketBeat, seven analysts rate the Pets at Home stock as a “moderate buy”, with a target price of 451.67p, which is up 38.4% from its August 23 closing price of 326 ,4p. Jefferies analysts rated the company a “buy” on Aug. 10, noting the company’s “resilience and growth.”

They also weighed in on the overall theme: “Looking ahead, we see the pet care market as fundamentally attractive, largely immune to the consumption cycle and… set to grow 4-5% in the medium term”.

IDEXX Laboratories Collapse but Vet Spending Remains High

The American company IDEXX offers diagnostic innovations for companion animals and veterinary practices. Despite being a key player in the veterinary care market, IDEXX’s share price has suffered a bigger drop than its peers, plummeting 45.8% year-to-date to August 23. According Zacks Stock Researchreasons include the company’s heavy reliance on third-party distributors and currency fluctuations.

In its second-quarter results in early August, IDEXX reported revenue of $861 million, up 4% year-over-year but missing the consensus forecast of $864.61 million. Earnings per share were $1.58, down 30% year over year and missing the consensus forecast of $1.65. The company said $80 million in discrete R&D investments and growing operating expenses had piled pressure on its results.

Analysts’ outlook remains mixed for the stock: The the wall street journal reports that of 12 analysts giving a rating, five recommend “buy” and four recommend “hold”, with a consensus rating of “overweight”.

Although IDEXX has received several downgrades from analysts in recent weeks, there are still reasons for optimism. Barclays analyst Balaji Prasad lowered his price target from $700 to $582 earlier this month, but retained an “overweight” rating on the stock. He noted spending on vet visits is increasing, but the recovery is likely to be gradual due to labor shortages.

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