VCA Antech Inc (WOOF), PetSmart, Inc. (PETM): Take Advantage of the Stable and Growing Pet Products Industry

Getting in at an attractive price

Quality limits your downside, but price determines your return. So your goal should be to pay a low price for a high-quality business.

VCA Antech Inc (NASDAQ:WOOF)’s animal hospital is not nearly as good as its labs — and unfortunately it seems content to continue moving away from its lab business. So VCA is the least attractive of the three on the quality scale and should be put aside from further consideration.

Idexx’s lab business has high and stable margins. It earned $164 million in free cash flow in 2012 and will likely earn between $160 and $175 million in 2013. $175 million divided by the company’s current market cap, $5.06 billion, suggests a 3.5% initial free cash flow yield. But Idexx is still growing, so the actual return on investment will probably be closer to double the initial yield, or 7%.

Luckily, PetSmart, Inc. (NASDAQ:PETM) is both high-quality and selling at a low price. The stock sells at just 11x pre-tax earnings — a bargain when you consider that it is growing at a high-single-digit rate. Investors keen on entering the pet business may have just found their entry point.

The article Take Advantage of the Stable and Growing Pet Products Industry originally appeared on Fool.com is written by Ted Cooper.

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