Dear Mr. Berko:

I think there is some money to be made in dog and cat health-care stocks. My new son-in-law has a dog, and he just spent $565 with the vet for surgery and medication. He didn’t even blink an eye, and that’s 50 percent of his weekly income. It seems that most pet owners spend more on their animals’ health than ever, and it seems that more people than ever own dogs and cats. So could you name two or three animal-health stocks in which I could invest about $5,000 each?

W.P., Durham, N.C.

Dear W.P.:

The animal health business might be more honestly profitable than the human health business, and a busy veterinarian can make as much money as a neurosurgeon with less than 20 percent of the aggravation. Today dogs have pacemakers, cataract, hip, bypass and intestinal surgery, and even plastic surgery. Veterinarians prescribe pills for high or low blood pressure, hepatitis, bronchitis, glaucoma, arthritis and hypothyroidism, allergies, plus chemo and radiation therapy and unguents for eyes, ears and skin diseases.

There are dog psychiatrists and psychologists; some specialize in just horses or dogs, others will treat only cats, and some just treat birds. There are animal trainers (like personal trainers for humans) who exercise your animal, help it lose weight and build muscle tone.

This year, U.S. pet owners will spend $9 billion for supplies and medication plus $9 billion for veterinary care. Also this year, the American Pet Products Manufacturers Association reckons that each of America’s 155 million pet owners will spend $1,600 on their canine companions. And these spending numbers are growing between 7 percent and 9 percent a year.

So, I like PetMed Express Inc. (PETS-$17.47) with $32 million in 2003 revenues, $55 million in 2004 revenues, $90 million in 2005 and an expected $140 million this year. Its earnings growth is just as phenomenal. PET earned 57 cents a share in 2005, expects to earn 72 cents this year, and the company has zero debt.

I also like PETCO Animal Supplies Inc. (PETC-$20.70), a $2.1 billion revenue company with more than 755 stores that sell premium pet foods, supplies, grooming products, toys, novelty items and vitamins. PETC also has grooming parlors, pet services and sells small animals. Earnings have been temporarily weak, but improvement is around the corner, and Value Line’s Scott Mintz believes that PETC can be a $43 to $48 stock in the next few years. I agree with Scott.

PetSmart Inc. (PETM-$25.78) is the nation’s largest pet food, supplies and service company with 785 superstores in the United States and Canada and $4.1 billion in expected 2006 revenues. Management anticipates that the company will open at least 150 new stores in the next two years, expects revenues to exceed $6 billion and believes that 2009 earning will come in at $2.40 a share. Thomson Financial has a moderately strong “buy” on PETM.

Finally, I think you should consider buying VCA Antech Inc. (WOOF-$28.96), which owns the largest chain of veterinary hospitals (371 of them in 37 states) in the world plus diagnostic laboratories. WOOF sells ultrasound, digital radiography and imaging equipment, and computer hardware, software and ancillary service to the veterinary market. The company also provides diagnostic testing for nearly 15,500 animal hospitals, large-animal practices, universities and governmental organizations. WOOF’s hospital veterinarians include specialists in animal oncology, internal animal medicine, dog cardiology, diseases of the spine and neck, doggie ophthalmology as well as general medical services. WOOF’s hospitals are supported by more than 1,100 veterinarians and last year were visited by 4.5 million animal patients. WOOF has 82 million shares outstanding. Revenues were $442 million, $544 million, $674 million and $799 million in 2002, 2003, 2004 and 2005 respectively, while per-share earnings were 41 cents, 55 cents, 76 cents and 93 cents. This year WOOF expects to generate nearly $1 billion in revenues and post earnings of $1.10. Not bad, that!

So if you want to play the animal health market, these four issues ought to give you more bark for the bite and put more meow in your mix.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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