February 13, 2008

Checking Out PETS

Zacks featered Pet Med Express in their daily Agressive Growth feature. Here is their analysis:

"PetMed Express (PETS) and subsidiaries, doing business as 1-800-PetMeds, is a leading nationwide pet pharmacy. The company markets its health products for dogs, cats, and horses direct to the consumer through national television, online, and direct mail advertising campaigns in an effort to increase the recognition of its 1-800-PetMeds brand name.

PETS offers a broad selection of products for dogs, cats, and horses. These products include brands of medication such as Frontline Plus®, K9 Advantix®, Advantage®, Heartgard Plus®, Sentinel®, and Interceptor®. The company offers two types of products: Non-Prescription Medications and Prescription medications.

The investment case for buying PetMed Express is a favorable industry environment, repeat customer business, and the potential for margin expansion. According to the American Pet Products Manufacturers Association, domestic pet spending in 2006 was $38.5 billion with pet supplies and medications accounting for $9.3 billion, or 24%, of that total spending.

In the third quarter of fiscal 2008, PetMed's reorder sales increased 28% year-over-year. The reorder business is helping drive the company's overall sales. The real strength here is that the reorder business provides a stable, recurring stream of revenue that allows the company to focus on new areas in which to grow its business.

Additionally, the company's business model could generate significant profit margin expansion in future years, as its sales climb. That s because it is able to increase its sales over a fixed operating base similar to other successful e-commerce business models. Moreover, this operating leverage combined with the company's stable revenue from repeat customers could lead to solid long-term profit growth.

On January 22, PetMed Express announced its financial results for the quarter ended December 31, 2007. Net sales for the quarter were $37.3 million, compared to $31.4 million for the quarter ended December 31, 2006, an increase of 19%. Net income was $4.4 million or 18 cents per share, compared to net income of $2.8 million or 11 cents per share for the quarter ended December 31, 2006, an increase to net income of 60%.

Over the past month, earnings estimates have been increasing. This year's estimates have risen three cents to 79 cents per share. Next year's numbers have also risen three cents. Four of the five covering analysts have boosted their forecasts. The company has posted an average surprise of 15.5% over the past four quarters. The stock is cheap at only 15x next year's estimates, below the long-term growth rate of 17.75%."

I also found a link to a Barron's article titled "Four Small Fries Worth Buying" which also analyzed the stock. Here is what they had to say:

"a leading nationwide pet pharmacy, earns an overall score of 99, ranking it No. 1 among the 23 stocks in the Internet retail group. The company boasts the group's highest financial strength score and fourth-best performance score. The company has no long-term debt and inventory levels are reasonable.

At the end of December, PetMed had more than $1.90 per share in cash. December-quarter earnings per share soared 64% to $0.18, exceeding the consensus estimate by $0.04. Earnings have topped the consensus in seven of the last eight quarters. Revenue increased 19% on strong reorders and a 23% increase in Internet sales. Operating profit margin jumped more than four percentage points, partly reflecting lower advertising expenses. The company added 127,000 new customers during the quarter.

For fiscal 2008 ending March, consensus estimates project per-share earnings of $0.79, up 32%. For fiscal 2009, per-share profits should approach $0.87. Considering the company's recent operating momentum and strong market position, those estimates seem beatable. PetMed is rated "buy.""

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