Despite the strong correlation between veterinary spending and discretionary spending, which has faced intense pressure throughout the past two years, vet spending growth once again beat the U.S. GDP in 2008 and 2009, at the height of the recession.
“I believe the main reason for this is the fact that the highest utilizers of animal health care products and services, or pet owners who have prioritized health care for their pets, continued to provide a base of demand and essentially supported growth in the low single digits,” said Dawn R. Brock, a senior analyst at Kaufman Bros., L.P., where she covers animal health care players IDEXX (IDXX) and VCA Antech (WOOF). “In my mind, the key is that organic volume appears to be stabilizing. Neither [IDXX nor WOOF] experienced pressure, so to speak, on the pricing front over the last couple of years, and I think the reason for that is just the fact that the price points are generally quite low and a 2% to 5% increase is optically negligible to the consumer.”
Brock likens the animal health care industry to the recession-resistant human health care sector, emphasizing the former’s core pet owner universe, which prioritizes animal care and provides an embedded base of demand for companies such as IDEXX and VCA Antech.
“Generally, IDXX and WOOF are focused in the subsectors that generate mid- to high-single-digit fundamental industry growth, and collectively they add to this growth by not only taking existing share, but acting as the primary consolidators in the space,” Brock said. “Add to this the fact that you get the benefits of human health care without the drawbacks – limited reimbursement, regulatory and headline risk wrapped in cash-up-front model – and this is why the stocks have typically warranted a premium to their earnings growth rates.”
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