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PetMed Express - Debt-Free with Attractive Dividend Yield

November 26, 2012 | About:
PetMed Express Inc. (PETS) is America's largest pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs and cats direct to the consumer through its 1-800-PetMeds toll-free number and on the Internet through its website.

Valuation

PETS is currently trading at a trailing 12 months P/E of 14.10 and a trailing 12 months EV/EBITDA of 6.09. PETS delivered a ROE of 19.9% over the past 12 months and a five-year average ROE of 26.4%.

Financial and Business Risks

PETS is debt free with cash and cash equivalents of $47 million representing 21% of its current market capitalization of $222 million.

PETS is facing increased competition from veterinarians and online and traditional retailers. PETS also claims that it has been informed by customers that some veterinarians have tried to discourage pet owners from purchasing from internet mail-order pharmacies, by refusing to provide customers with a copy of their pet’s prescription, preventing PETS from filling such prescriptions under state law. Sales of prescription medications represented approximately 40% of PETS' sales for 2012. Customer acquisition costs have also increased to $42 from an average of $36 from 2007 to 2010, reflecting the efforts to win customers.

Consumers are giving increased consideration to price and trading down to less expensive brands. This is partly reflected in average order size for 2012 dropping to $76 from $82 in 2009. PETS is selling generics and private labels in a bid to boost margins.

Historically, substantially all the major manufacturers of prescription and non-prescription medications have declined to sell these products to direct marketing companies, including PETS. PETS does not have direct accounts with some of the major manufacturers of pet medication. Instead, PETS purchases medications from various secondary sources, including a variety of domestic distributors. In March 2010, Bayer started making their products available directly to pet specialty retailers and internet sites, including PETS.

Business Quality and Capital Allocation

PETS is America's largest pet pharmacy, with a five-year sales CAGR of 11% in direct marketing and a five-year sales CAGR of 16% in e-commerce. According to the American Pet Products Manufacturers Association, the pet market in the U.S. is estimated at $51 billion in 2011, of which $4 billion relates to pet medication. It is estimated that PETS has a 6% market share of the pet medication market, with veterinarians and retailers having 67% and 22% of the market share, respectively.

PETS provides an attractive alternative to veterinarians for obtaining pet medication in terms of convenience, price and speed of home delivery. Seventy-eight percent of orders are shipped within 24 hours. PETS' exceptional customer service and support is evidenced by its OpinionLab score of 858, which is a website satisfaction benchmark, and trumps the average online retailer score of 450. Its Net Promotor score of 75% is within the top 2% of companies which use this measure.

PETS has paid a dividend every single year since 2009 and has a dividend yield of 5.4% and a corresponding dividend payout ratio of 73%. Dividends are paid quarterly and supported by solid cash flow generation. PETS has delivered positive free cash flow since 2005, with five-year cash flow from operations CAGR of 24%.

Conclusion

A debt-free balance sheet with an attractive dividend yield of 5.4% puts this stock on my watch list. Valuations are not compelling enough for entry, given that this is a competitive industry where PETS has no distinct competitive advantages.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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