-PetMed Express, Inc. (PETS) is a small-cap pet medication retailer that has recently begun paying dividends, and is still poised for excellent growth.
-Revenue growth over the past 5 years has been 18.5% per year, on average.
-Earnings growth over the same period has been an incredible 32%.
-Cash flow over the past 3 years is lagging, with only 9.5% 3-year annual growth. This is due to a large increase in inventory in 2009.
-Dividend yield is currently 2.10%.
-Balance sheet is absolutely flawless; tons of cash and zero debt.
-Overall, the PETS is a reasonably valued, high-potential, small-cap dividend-paying investment that can add market-cap diversification, increased rate of return, and increased risk to a solid dividend portfolio.
-The current price is a bit high for me, but I’d consider making an investment in this company if share price dropped to $18.
-Dividend Monk Rating: B+
PetMed Express, Inc., operating through 1-800-PetMeds, is an unlikely dividend pick. Founded in 1996, the company currently has a market cap of around $450 million and as of August 2009 has begun paying dividends.
PetMed Express is an online and phone retailer specializing in pet medication and other pet products. They offer brand name products at lower prices than veterinarians, and ship straight to the consumer. They also work with a site called “PetHealth101” that provides online information for pet illnesses.
Revenue, Earnings, and Cash Flow
Revenue growth is important for a company because it allows for sustained earnings growth, and shows that the company is indeed in a profitable and growing niche and is taking advantage of growth opportunities.
From 2004 to 2009, that’s an impressive annual revenue growth rate of 18.5%.
Earnings growth rate has been huge over the past five years, though is slowing down a bit. Still, even during the midst of the Great Recession, the company managed to grow at a decent rate.
Annually over five years, PetMeds has grown earnings at a rate of nearly 32% per year.
Cash flow is important to consider because it is more reliable than earnings reports and shows the true profitability of a company.
Cash Flow Growth
As can be seen, Cash flow growth over the last four years is a less impressive, yet still respectable, 9.5% annual rate. This is due entirely to 2009, when PetMeds saw a large increase in inventory.
Net profit margin over the past twelve months is a solid 11% compared to their 5 year average of 9.5%. In comparison, massive online retailer Amazon has a 4% net profit margin, and brick-and-mortar retailers usually have a lower net profit margin than that.
Overall, growth is quite impressive for a company that pays dividends.
Dividends and Share Repurchases
Dividends began in August 2009, and the current yield is 2.10%. Payout ratio is a bit too new to accurately calculate but based on the current annual dividend of $0.40, the payout ratio is 40% based on 2009 earnings and 35% based on predicted 2010 earnings. They do not yet have a precedence of dividend growth, as it’s been less than one year since they began paying a dividend.
In addition to dividends, PetMed Express has repurchased $11.6 million worth of shares in 2008 and $18.45 million worth of shares in 2009.
As can be seen, even while still small, PetMeds is a very shareholder friendly company, responsibly returning money back to the shareholder instead of using all of it to fund growth.
PetMeds sports a flawless balance sheet. As of December 2009, the company has $56 million in cash and zero debt. The quick ratio is 10 and the current ratio is 14.6. You don’t find many companies with this kind of enviable position. It does show that management is somewhat conservative, but also shows that they are able to obtain rather dramatic growth without any leverage at all, which is impressive.
PetMeds Express has driven impressive growth with no leverage, and is projected by analysts to have boosted earnings by another 18% when they report in 2010. Currently, PetMeds only has 6% of the market share in their industry, and so they have a wide range of growth opportunities available. Their retail and mail order competition is highly fragmented, with 21% of the market share in total. By far the largest holder of market share is veterinarian offices, with 72% of market share, where consumers buy higher priced products for convenience.
I believe that PetMeds will continue to pull market share away from Veterinarian offices as consumers realize the convenience and low prices of mail-order medications, especially in this cost-cutting, debt-reducing economy. In a high employment and uncertain economic environment, people don’t get rid of their pets but they certainly do look for cheaper medications.
Something that particularly stands out to me for PetMeds is their rate at keeping repeat customers. 4.6 million people have ordered products from PetMeds in their history as a business, and 2.5 million of them have ordered in the last two years. The company has also been increasing their collection of new customers, with 802,000 new customers during their 2009 year. Lastly, in the last four years, PetMeds has increased average order size from $76 to $82, so they are succeeding in all aspects of business: developing new customers, keeping customers, and increasing per-customer sales.
PetMeds Express, Inc. has risks just like any other company. They are a retailer, a glorified middle man, and therefore have little to no pricing control. They do have a very recognizable brand name, but other than that, they don’t have any significant competitive advantage over any potential competitor. As a rather small company, they also face larger volatility than larger dividend-paying companies. In fact, back in October 2009, the company share price dropped over 20% in a matter of days, though it quickly rebounded. Another risk is volatile cash flow and slowing growth, which may upset the future share price. Compared to other dividend-paying stocks, I consider this a rather high reward, high-risk company, though as long as it remains reasonably valued, it’s not as risky as some other companies out there.
Conclusion and Valuation
Based on the historic growth, projected future growth, and an excellent balance sheet, and the 2.1% dividend yield, I would pay up to 17x earnings for this company. Based on $1.14 earnings in 2009 (for the four quarters of fiscal year 2009, not their report year that ends in March), that puts the price at $19.38, which is exactly what the stock is currently at. Due to volatility, however, there may be opportunities to pick up this company at a lower price, and so to improve my safety in this investment I would consider picking up shares only if the price drops below $18.
Full Disclosure: None
What do you think of PetMed Express, Inc.? Let me know with a comment.