Love Your Pet? Here's How to Make Money on the Booming Pet Business

By Markets Fool.com

Image source: Getty Images.

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Animal owners will do almost anything to make sure their favorite pets live long, healthy lives, and as a result the pet industry is a booming business. According to the American Pet Products Association, spending on pets has grown from $38.5 billion per year a decade ago to an estimated $63.8 billion in 2016.

That's the kind of growth industry investors are always trying to identify, and it's been right under our noses. If you want to make some money on the growing trend of spending for pets, here are a few places you should look.

Pets and gardening collide

Central Garden & Pet Company (NASDAQ: CENT) makes products for both gardening and pet markets. But pet care is more than half of the business, and it's growing quickly with brands like Adams, Bio Spot, and Breeder's Choice.

In the fiscal third quarter of 2016, pet segment sales rose 20.6% (4.3% organically) to $287.2 million, compared to revenue of $227.3 million in the garden segment. Not only are sales growing, the bottom line is improving as well. Net income was up 38% last quarter to $26.0 million, or $0.51 per share.

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Top-line growth in the pet business should give Central Garden & Pet Company the ability to use its operational leverage to grow net income faster than sales. And if that continues, the stock's 20.5 forward P/E ratio could be a steal for investors.

Mail-order pet meds

One of the better-known companies in the pet industry is 1-800-PetMeds, which is a subsidiary of PetMed Express (NASDAQ: PETS). The company dubs itself the country's largest pet pharmacy, doing most of its business online.

The company is growing steadily, increasing sales 7.2% in the fiscal second quarter to $60.8 million and improving net income 8.8% to $4.9 million. What's kind of amazing is PetMed Express' capital-light business model and balance sheet: The company doesn't have any debt, and it still has $51.9 million in cash on the balance sheet. With cash continuing to come in from operations, the business is in a strong position to return cash to shareholders in the future.

PetMed Express also pays an $0.19 per share dividend each quarter, giving the stock a 3.8% yield today. That's not bad in a pet business that has a lot of growth ahead.

Image source: Getty Images.

The booming pet hospital business

VCA Inc (NASDAQ: WOOF) is a provider of pet hospitals and laboratories across the country. It's basically just a network of vet clinics because the company's strategy is to buy clinics to grow the network. On VCA's homepage, there's even a link for pet hospital owners who are considering selling their business.

Financially, the strategy is working very well. Recently reported third-quarter revenue jumped 19.1% from a year ago to $656.9 million, and operating income was up 10.2% to $107.0 million. For the full year, management expects earnings to be $2.87 to $2.97 per share.

As people spend more on pets, they're also performing more procedures and getting tests that haven't always been standard in the industry. That'll help VCA continue to grow, and the model of consolidating pet hospitals in a fragmented industry could lead to a profit boom long term.

The food-safety company

The fourth company on my list is Neogen Corporation (NASDAQ: NEOG), which makes pharmaceuticals, vaccines, diagnostics, and other products for the animal food-safety market. Most of its animal business is serving veterinarians like VCA with the products they need.

There's also a food safety business that test for sanitation, spoilage, and allergens in food for animals and humans. And business is doing quite well. Fiscal first-quarter 2017 earnings announced in September showed a 12% increase in revenue to $83.6 million, and net income rose slightly to $9.9 million, or $0.26 per share.

The downside of Neogen is that it's a very expensive stock at a P/E ratio of 54 times trailing earnings. But if the company continues to grow and margins improve, it could still be a winner for investors long term.

Petco and Petsmart taken private

You may notice that two big names in pet retail --Petco and Petsmart-- weren't on this list. That's because they were taken private by private equity firms. The big money has seen the growth in pet spending, and they like where the industry is headed.

That interest from private equity is another reminder that there's a lot of tailwind behind the pet business right now, and I don't see the momentum stopping. For pet lovers, these four companies are great ways to make money off of the industry's growth trend.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.