Pet-related companies are highly sought after
Having said that, it would appear that in comparison to the rest of the pet-related sector, Zoetis is fairly valued. Peer MWI Veterinary Supply, Inc. (NASDAQ:MWIV) trades at 27 times forward earnings, and again the company is highly defensive, engaging in the distribution of animal health products to veterinarians in the United States and the United Kingdom. Veterinary supply is exposed to the same demand factors as Zoetis — greater demand for animal treatments will lead to more demand for the distribution of animal health products.
However, as with many distribution companies that do not manufacture the products themselves, MWI Veterinary Supply, Inc. (NASDAQ:MWIV) has a tiny net profit margin of only 2.8%, gross margin stands at 13%. The company is cash generative and paid down $52 million of debt during the second quarter, but it would appear that this was a one-off as for the past four years free cash flow has been minuscule or negative. MWI Veterinary Supply, Inc. (NASDAQ:MWIV) does not offer a dividend, but sales have expanded 121% over the past four years. Still, for 27 times forward earnings, I would prefer a stronger cash flow and perhaps a dividend.
Defensive yield
Petmed Express Inc (NASDAQ:PETS) is a pet pharmacy that markets prescription and non-prescription pet medications, health products, and supplies for dogs and cats. Petmed Express Inc (NASDAQ:PETS) does offer a dividend, which currently works out to yield 4.3%, which is easily covered by free cash flow (apart from during Q1 2013 and Q4 2012 when the company paid out special dividends from its cash balance). The payout of $0.17 per quarter is costing the company roughly $3.5 million in total per quarter, free cash flow for the first two quarters of this year was $27.3 million compared to a total payout of $7 million.
Petmed Express Inc (NASDAQ:PETS) has a gross margin of 66% and a debt-free balance sheet, in fact the company has $50 million of cash and short-term investments as of the end of Q2, 16% of the company’s $317 million market capitalization. Furthermore, Petmed Express Inc (NASDAQ:PETS) trades at the lowest valuation in this piece, a forward earnings multiple of 16.7 makes the company look cheap for the sector and in comparison to its return on assets, which stands at 23% — high for most industries.
Foolish summary
All in all, the demand for animal treatments — in particular, those for pets — is continually rising around the world, and these three companies are benefiting.
However, due to their defensive nature, both Zoetis and MWI Veterinary Supply, Inc. (NASDAQ:MWIV) look very expensive and don’t really offer much in the way of a dividend. On the other hand, Petmed Express Inc (NASDAQ:PETS) offers a strong 4.3% dividend yield, well covered by free cash flow, and the company trades at a low forward valuation in comparison to the rest of the sector.
The article These Highly Defensive Animal-Related Companies Look Attractive originally appeared on Fool.com and is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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