PetSmart, Inc. (PETM) & Petmed Express Inc (PETS): Little Followed Company Earns Outsized Profits in Pet Industry

VCA competes with IDEXX Laboratories, Inc. (NASDAQ:IDXX) in diagnostic lab test for animals. Idexx benefits from being a large company in a fragmented industry. Its high and reliable margins enable it to produce north of $160 million in free cash flow each year on just $1.3 billion in sales.

Moreover, as diagnostic tests for animals become more complex, IDEXX Laboratories, Inc. (NASDAQ:IDXX)’s margins will increase further along with its growing advantage over smaller labs with less investment in R&D. As a result, Idexx will likely remain at the top of the industry for years to come.

Luckily, VCA’s strategy allows it to operate in the high-return diagnostic lab industry without having to butt heads directly with IDEXX Laboratories, Inc. (NASDAQ:IDXX). Most of VCA’s lab business comes from its own hospitals, not from hospitals that could easily switch to Idexx. This gives VCA a tremendous advantage that is available to no other company in either market.

Although the diagnostic lab side of VCA’s business is the most profitable, its animal hospitals are profitable as well. Its animal hospital segment is essentially a roll-up of veterinary clinics that may have been part of a two- or three-clinic chain before it was acquired by VCA. The roll-up strategy has enabled VCA to achieve economies of scale in a highly fragmented industry.

Bottom line

The pet products industry is booming and the companies at the front of the pack are reaping most of the rewards. PetSmart, Inc. (NASDAQ:PETM), IDEXX Laboratories, Inc. (NASDAQ:IDXX), and VCA Antech Inc (NASDAQ:WOOF) are successful because they are the largest companies in fragmented markets. These companies have achieved economies of scale that no other competitors can match. As a result, each company will continue to thrive as the industry booms.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends PetSmart, Inc. (NASDAQ:PETM) and VCA Antech Inc (NASDAQ:WOOF).

The article Little Followed Company Earns Outsized Profits in Pet Industry originally appeared on Fool.com.

Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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