3 Pet Product Stocks Ready to Be Unleashed: Dogness, Elanco and Zoetis

In addition to bringing smiles to people, pets can bring significant profits to companies that cater to this niche market. Three experts, and contributors to MoneyShow.com, highlight companies involved in both pet products and the more general market for animal health and livestock care. Steven Silver, Argus Research Dogness International , founded in 2003, is a designer and manufacturer of high-quality pet products. These include leashes, harnesses and, more recently, a suite of smart products that are designed to capitalize on the migration of consumer product trends towards connectivity and remote access. In our view, Dogness is well positioned to capitalize on favorable trends in the pet care industry, which historically has been insulated from recessions and economic cycle downturns. In December 2017, Dogness raised net proceeds of approximately $50.2 million from an initial public offering. The company ended its fiscal year on June 30, 2018, with more than $35 million in cash and short-term investments, which we believe will allow it to execute on its growth strategy. Subsequent to the IPO, Dogness acquired a manufacturing facility in China and has launched a series of new smart pet products (including connected collars, harnesses, feeders, and play robots) which we expect will drive robust revenue and bottom-line growth in the coming years. The shares are trading at roughly 13-times our EPS estimate of $0.27 for fiscal 2019. We do not believe that accurately reflects above-average revenue growth expectations (42% in fiscal 2018) and is limited by greater near-term investments and marketing spending. We view the shares as having upside and a fair value of $9. The company has established an impressive track record of product innovation and seems well positioned for long-term growth due to its fully integrated manufacturing chain. It also has established commercial infrastructure in its core China and the United States markets, and benefits from the recession-resistant nature of the pet industry. At the end of its fiscal year 2018 (June 30, 2018), the company's products were sold in 69 countries. Exports outside of China accounted for 50% of fiscal 2018 sales. The U.S. represents a key market for continued growth, as Dogness shifts its product portfolio towards smart products. During fiscal 2018, Dogness launched its Smart Pet Ecosystem. This is a suite of technology-driven products that link pet owners and their pets through a single app platform that is compatible with both Android and iOS devices. We expect these products to drive compelling revenue growth and gross margins over the long term. Smart products unveiled to date include a pet food feeder, water fountain, treat dispenser, and smart pet toys and robots. Most of the devices have a high definition camera that enables the pet owners to interact with their pet remotely. In addition, the company's H2 and C2 smart harness and collar products were developed in collaboration with world class technology companies. These products are still in the very early stages of their commercialization cycles. Between 2015 and 2017, Dogness had more than 120 patents approved or pending. Since its IPO in late 2017, the company won four additional international patents in the smart product category and has more than 20 new patents currently pending. We expect fiscal 2019 revenues to rise by 20% to $36 million (at the high end of the company's 10%-20% growth outlook) as the commercial rollout of the smart product portfolio gains traction over the course of the year. We expect revenue growth to remain robust over the coming years, based on the launch of upgraded products stemming from Dogness' commitment to R&D. Fiscal 2019 is likely to be a year marked by significant investment. We expect both R&D expenses and SG&A expenses to continue to increase, as Dogness invests in future growth initiatives for both products and infrastructure. In our view, the current valuation does not fairly reflect the 42% revenue growth Dogness achieved in fiscal 2018; its future growth prospects; and its vertically integrated manufacturing platform, which can drive enhanced economies of scale and superior long-term operating margins. Jim Powell, Global Changes & Opportunities Report The animal care industry has been expanding for several years, and offers considerable promise for investors. The rising popularity of pets is leading the way. The boom in pets is being supported by millions of Americans who are deciding not to have children, or are having fewer of them. The declining birthrate is leaving many people feeling unfulfilled -- a condition they often relieve by having dogs and cats. In our high-stress world, I think the trend to treat pets like children will increase. Pets are especially popular with America's 71 million millennials. The pet care industry is highly resistant to economic downturns. During the Great Recession, pet expenditures increased while nearly every other sector lost ground. It helps that the animal care industry is largely free of government meddling. Pet medications must be approved, but the process is far quicker and less expensive than for human drugs. There is also no Medicare or Medicaid bureaucracies to deal with in the pet care industry. And while pet care gets the most publicity, the care of farm animals is also a fast-growing industry. America is the OPEC of food production partly because our livestock, poultry, and farm-raised fish get the world's best care. Agricultural companies in Asia are now trying to catch up with their U.S. competition by purchasing more of our animal healthcare products. The best way to invest in the fast-growing animal healthcare industry today is to buy stock in the companies that make the proprietary products that are in high demand. One producer looks especially attractive. I believe the most promising animal healthcare company for long-term investors is Zoetis . The company was founded in 1952 as a division of the pharmaceutical giant, Pfizer . Pfizer Animal Health (as it was called at the time) developed several successful drugs for treating livestock diseases. The division soon expanded as Pfizer acquired several rival animal pharmaceutical companies that had products for both livestock and companion pets. In 2012, Pfizer decided to spin off its animal health division as a standalone company it named Zoetis. A year later, Zoetis went public. Today, Zoetis markets a full range of diagnostic products, vaccines, medicines, and genetic tests for dogs, cats, horses, pigs, beef cattle, dairy cattle, sheep ducks, chickens, geese, and several species of fish used in aquaculture. In total the company produces over 300 animal health and nutrition products that it markets worldwide. Until the recent correction brought most stocks sharply down, Zoetis was doing very well. When the the downturn ends, I think the stock will quickly resume its upwards course. Until then, investors have an excellent opportunity to buy this promising company at a significant discount. If you would like a diversified investment in the pet care industry, you may wish to consider the ProShares Pet Care ETF . This fund offers investors broad exposure to public companies in the global pet care industry. ProShares Pet Care ETF was launched in early November 2018. Jasper Hellweg, Argus Research We are initiating coverage of Elanco Animal Health , a leading animal health company, with a buy rating. This well-managed company, which was a September 2018 spinoff from Eli Lilly , makes health and nutrition products for both companion and food animals. Founded in 1954, Elanco has a record of consistent growth and has tripled in size over the past ten years. While Elanco is likely to experience some initial growing pains as a standalone public company, we expect it to generate strong earnings growth over time. Our target price of $37 implies attractive potential total return from current levels. Elanco's three-pillar growth strategy focuses on portfolio development, innovation, and productivity improvements. With regard to portfolio development, management believes that the company has above-average growth prospects in companion animal disease prevention, companion animal therapeutics, and food animal future protein and health -- which should benefit from both an expanding overall market and Elanco's strong product pipeline. It plans to focus on these areas going forward, though it will also look for opportunities to expand its portfolio of ruminant and swine products. As for innovation, Elanco has launched an average of nearly three products per year since 2015, and has 36 pipeline products that are 1-4 years from launch. In 3Q18, it launched the Prevacent PRRS vaccine, for the prevention of porcine reproductive and respiratory syndrome in piglets, and Credelio, the first orally administered flea and tick product for cats. It also introduced Correlink, a blend of probiotics for poultry, in Asia. The company also reintroduced the 100mg formulation of Galliprant, a more convenient dosing option of its nonsteroidal anti-inflammatory drug for larger dogs. Elanco is also partnering with the Danish biotech company Novozymes to develop nutritional health products for beef and dairy cattle. To value the stock on a fundamental basis, we use peer and historical multiple comparisons, as well as a discounted cash flow model. At current prices, the shares are trading at 29.0-times our 2019 EPS estimate, above the industry average of 27.9, and at 3.7-times sales, in line with the peer average. The company has not yet paid a dividend, although it plans to launch one in 2019. It does not have a share buyback program. Given the company's growth potential, cost-cutting efforts, and record of successful product launches, we believe that Elanco has the potential for positive earnings surprises and that the shares warrant a premium valuation. Our target price of $37 implies a multiple of 34-times our 2019 EPS estimate.

3 Pet Product Stocks Ready to Be Unleashed: Dogness, Elanco and Zoetis

Pets can bring significant profits to companies that cater to this niche market.

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