Is Mars Inc. Going to the Dogs?

Tails are wagging at VCA Antech, the animal hospital operator that was just acquired by privately held food conglomerate Mars. VCA’s stock, whose adorable ticker is WOOF, was bought for almost $91 per share Monday morning. The purchase threw shareholders a 28% bone overnight, and a one-year mouth watering gain of 93%.

Mars’ $7.7 billion purchase price values VCA at a generous 33 times trailing twelve month earnings. In addition, the VCA business is quite different from the Mars basic animal business of selling high end pet food. Its Pedigree, Iams and Royal Canin pet foods make up the bulk of its pet business. This deal doesn’t make intuitive sense to me, which piques my curiosity.

Usually when a company pays beyond top dollar in an acquisition there is one of two things going on. The first is that the acquired company is in such a hot spot of an industry and growing so quickly that the purchaser had to pony up in order to seal the deal.

Seeing that VCA’s revenue and earnings’ growth is set to slow, this doesn’t seem likely. VCA’s revenue grew 17% in the first nine months of the year but that growth will slow markedly as the benefit of its own acquisitions fades. Publicly-traded animal lab competitor Idexx is growing revenue about 10%, the same level that VCA was growing before its acquisition of a group of animal hospitals in Las Vegas (those gambling greyhounds are dog tired!).

If VCA isn’t going to give the expected jolt to Mars’ earnings that one would expect based on the price, something else must be going on. It’s quite possible that Mars’ basic business is going to the dogs.

Sales of premium pet food has had an incredible run. Humans serving their animals high end beef and warm tuna is not news. Alas, my high strung Jack Russell mix is happy to be fed a scoop of Science Diet each day. But this is not a new trend and the above average growth of premium pet food is likely fading.

After expanding distribution to mass merchants and increasing the number of items sold in specialty pet super stores like Petco and Petsmart, Mars likely ran out of room to grow in the category.

As Mars is a private company we don’t have a whole lot of disclosure about its sales growth and profit trends. However we do know that Blue Buffalo, a publicly-traded maker of premium dog food, has seen a slowdown in revenue growth in the past few quarters to just 10%.

The other part of Mars’ business, the part filling human stomachs, is its candy business. We don’t have any pure comparison for the economic state of this operation, but do know that many grocery stores have suffered recently from lower sales.

Although there’s not much for investors to do regarding the current deal, a plethora of investment ideas are born from the analysis of this deal. I’ve already been sniffing around at some bearish calls on suppliers to the grocery stores and will analyze whether a competing deal for any other animal health company might be in the works. In any case I’ll be barking loud to Profit Catalyst Alert subscribers with any new trade ideas born from this litter.

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