By Linda McDonough

Animal spirits are alive and well in the veterinary sector.  Recent speculation that Valeant Pharmaceuticals International (NYSE: VRX) would bid for animal vaccine and medicine maker Zoetis (NYSE: ZTS)  is not surprising based on the rapid consolidation in the animal health sector seen over the last year.

Although there are fewer independent names left in this industry, we’ve uncovered a few meaty bones that offer exposure to this highly profitable sector. IDEXX Laboratories (Nasdaq: IDXX), the kingpin in diagnostic veterinary tests, and our very own Roadrunner stock, VCA Inc. (Nasdaq: WOOF), both offer investors a tasty treat.

Zoetis was spun out of Pfizer (NYSE: PFE) in 2013 to allow Pfizer to focus solely on its pharmaceutical business. Since that time, the stock has risen 55% despite a dramatic slowdown in its revenue. Unlike Pfizer most other medical conglomerates have turned on their tails and begun buying up animal health stocks in order to capitalize on higher growth and more attractive margins.

Companies in the drug and diagnostic area are keen to diversify their medical operations, whose profits are increasingly getting squeezed by health insurers, into the sale of veterinary products, which are paid for out of pocket and are less susceptible to generic competition. In addition, drugs and diagnostic products for animals are not subject to lengthy FDA reviews, allowing companies to turn around animal research dollars much faster than those allocated to human drug development.

The recent acquisition spree began in April 2014 when Eli Lilly (NYSE: LLY) agreed to acquire Novartis Animal Health for $5.4 billion, valuing the company at a very-pricey 28 times EBITDA. In January of this year, AmerisourceBergen (NYSE: ABC) agred to purchase MWI Veterinary Supply for $2.5 billion,  or 21 times EBITDA.  Less than six months later, Patterson Companies (Nasdaq: PDCO) bought Animal Health International for $1.1 billion or roughly 17 times EBITDA. All three targets are distributors of veterinary products and produce similar profit margins.

Although IDEXX Labs trades at 18 times EBITDA, its business of selling diagnostic blood tests to vets is more than 5 times as profitable as MWI and Animal Health. This level of profitability comes as no surprise to this pet owner who gasped at the $400 charge for routine Idexx blood tests done on her Basset Hound during an annual visit to the vet. A recent weak quarter due to the transitioning of some distribution channels put Idexx in the dog house.  Its stock is down 15% year to date but this bump in the numbers is likely temporary.  Idexx’s high level of profitability and above average 8% revenue growth make this a thoroughbred investment.

VCA has been discussed at great length in the Roadrunner Momentum portfolio but continues to demonstrate purebred growth.  In the most recent quarter, revenue grew 11%, an acceleration from the company’s 2014 annual growth rate. As a service provider, VCA is slightly less profitable than Idexx but its valuation of 13 times EBITDA reflects those numbers.

As the medical industry continues to froth at the mouth for above-average growth and profitability, these two stocks will leave investors purring.  Even without getting “adopted” by larger conglomerates, IDEXX and VCA are excellent companions for any portfolio.