Animal Healthcare Is Barking Up the Right Tree, but Valuations Remain High

Amid much media attention and anecdotal evidence suggesting widespread, significant growth in pet adoptions across the United States during the pandemic, we took a closer look and estimate there was a 13% net increase in dog adoptions in 2020 year over year, based on consolidated shelter data and American Kennel Club records. It is less clear what the rise in cat adoptions was, as there is simply less reliable data for cats. Nonetheless, we think this increase in adoptions, along with the extended period of intense pet bonding for new and existing pet owners during the pandemic, should support the robust increase in pet healthcare spending seen initially in 2020 to extend over the next eight to 10 years, reflecting the general lifespan of newly adopted pets. While we have dialed up our cash flow projections for narrow-moat Idexx Laboratories and wide-moat Zoetis, their share prices remain rich and imply wildly optimistic expectations.