SIMON BROWN: I’m chatting now with Andrew Dittberner, a chief investment officer at Old Mutual Wealth. Andrew, I appreciate the early morning time. The pet-care industry – an amazing piece of research that you included in a note out earlier this week, that over 11 million Americans got a new pet during the pandemic, and half of the British households who had a pet added another one during lockdown. I know anecdotally from my social circle people were out and buying pets. The pet-care industry, even without the pandemic, is one that is really a high-quality investment case. People are buying pets and spending money, and I know from my own pets in some cases a lot of money.
ANDREW DITTBERNER: Good morning, Simon. Yes. Often when I look at or think of these trends, we are fixated right now on technology. I’m thinking about artificial intelligence, autonomous driving and so on, and people often overlook smaller industries, but industries that have very strong tailwinds in place. You highlight a couple of points, people buying new pets recently and maybe has been a bit of an acceleration, I suppose, during lockdowns, economic lockdowns.
I suppose millennials these days aren’t having as many children and pets are their children. But this is also a trend that’s been in place for centuries actually when we think about the domestication of pets. So it lends itself to some very interesting investment opportunities which we’ve looked at. It’s not just pet care, it’s also growing populations, growing middle incomes, and people wanting to consume higher-quality protein. So it also talks to livestock, looking after animals on that side of the fence as well. It’s a very interesting investment opportunity at the moment.
SIMON BROWN: I hadn’t even thought of livestock in that equation as well. One of the points you make – we’ve been talking about how during the pandemic if anything, it boomed. People got more pets. It’s going to be fairly recession-proof. There are going to be recessions from time to time, but you’re not going to stop feeding your pets. You might shop down a little if you have to, but it’s going to hold fairly well during the tougher economic times, and yet still potentially give us the boom during the good times, because then you can go out and buy more chewy toys for your dogs or scratch pads for your cats.
ANDREW DITTBERNER: Absolutely. The company that I highlighted in the note you refer to is Zoetis, which is effectively a pharmaceutical business for animals, both pets and livestock. And if you look what it’s done, you can go back to the global financial crisis, and it grew its revenues quite handsomely during that period. Look back over last year, this economic shutdown, and I think it grew revenues in the region of about 7%. So, as you say, very, very recession-proof.
And another factor I think that we really like is the fact that when you think about pharmaceutical companies they often face patent lists, so you’ve got the patents and eventually they run out and then you get the generic competition coming through. This is a pharmaceutical company for animals that don’t face those patent lists and very few generic competitors as well. When you look at some of their drugs or products, rather, the average age of the top 20-odd products is about 30 years. So once you’re in a dominant position and Zoetis is very much the global leader in this space, once you are in a dominant position, it’s very difficult for new upstart competitors to come and spend the money and compete with your products that have been on the market for many, many years.
SIMON BROWN: It’s that massive barrier to entry. You mentioned earlier some people having fewer kids, and in some cases, the pets are almost like their kids. You’re not going to suddenly switch out of a product. I know the cat in our house, she eats a certain brand and that is it. We wouldn’t dare change it. It gives those barriers for entry from a technological patent perspective, but also just from a consumer who says, “This is what we buy our pet. And so we will.”
ANDREW DITTBERNER: Yes, exactly. Your pets essentially become your children, as you say. And you definitely are not going to skimp on the costs when it comes to feeding them, or if something’s wrong and medicating.
I think another point maybe when thinking about the investment case for these types of business is also the markets. When you look at it from a competitor perspective, Zoetis is one of the top four that account for more than 50% of this market globally. So you’ve got rational competition in here. But then there are some smaller players which allow for decent acquisitive opportunities in the space, which we’ve seen over the years.
And then also, when thinking about your clients, they’ve got obviously thousands and thousands of very small clients. These aren’t businesses that are business-to-business, that have very big clients that obviously lend themselves to those clients having bargaining power when it comes to pricing. So with thousands and thousands of small clients around the world, it gives a business like this pricing power. And then you start to see that coming through in the company fundamentals when you look at it from revenue growth, profitability margins and a growing bottom line.
SIMON BROWN: I think a great industry and tons listed in the US; there is Chew and others. Zoetis is the one we are talking about here. Andrew Dittberner, chief investment officer at Old Mutual Private Wealth, I appreciate the early morning.
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