We've been pounding the table on the humanization of pets as one of the great secular growth themes for so long that we had pretty much taken it for granted that everyone knew it.
What we didn't take for granted, however was that Mars, the privately held food giant that also happens to be one of the most sophisticated companies in the pet industry, would pay a gigantic premium for (WOOF) , today, WOOF being the symbol for VCA, better known as Veterinary Centers of America. Shareholders of VCA have to be thrilled with the 41% gain they walked into this morning, as Mars will put VCA alongside its own Banfield pet hospital chain, creating a dominant health-care company for companion animals.
Mars isn't new to the space. Besides health care, it offers two of the best premium food brands, Iams and Sheeba, both of which are respected as among the healthiest of offerings.
Why is this deal happening? A couple of reasons. First, the spending on companion animals has been compounding, and is among the highest rates of any consumer outlays as pets have moved from the basement to the bedroom and finally the bed. The numbers here are incredible: Americans' spending on pets has exploded in the 21st century, more than doubling since 2001 -- from $28.5 billion to $60.3 billion, according to the American Pets Products Association.
How can it not? Americans own 77.8 million dogs, representing 54.4 million households -- and 85.8 million cats, or 42.9 million households.
Second, pet care is often a cash business, no worries about reimbursement from the government. Third, there aren't that many large scale companies with big exposure to this group. I love equity scarcity, it bodes well for the other companies in the industry.
And who are the other companies? Let's start with Idexx Labs (IDXX) , the leader in pet health-care innovation which, like Mars, does diagnostics for vets. CEO Jonathan Ayers first put the humanization of pets thesis in front of us, and this company has stellar 10% organic growth, with huge gross margins. Idexx is a tech company, which constantly comes up with new products for vets. The latest, a urine sample diagnostics machine, has Ayers crowing about liquid gold.
We like Zoetis (ZTS) , the Pfizer spinoff that is largely focused on livestock animal health. It is a terrific business. And then there's Henry Schein HSIC, which is primarily a dental supply company that has moved aggressively into vet supplies.
We aren't as high on the pet food companies, in part because of pricing competition and in part because of Amazon (AMZN) , which has taken the margins out of a lot of these companies. We are lukewarm on both Blue Buffalo (BUFF) -- even as my dogs, Everest and Bug, go nuts for the stuff -- and Freshpet (FRPT) , which is the high-end refrigerated food business that we've found is too easily confused with the various human means we keep in the fridge.
That's another reason why the Mars bid for VCA makes so much sense. Anything that makes any company less dependent on pet food and more dependent on animal health is a winner.
I don't think the other companies are takeover targets. But I do think that Idexx can work its way higher over time. We'll miss VCA as part of the cohort, nevertheless it reminds us of how much more Idexx is worth than it currently sells for.
