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Barel Karsan
Barel Karsan

Mr. Market Hammers PetMed ($PETS)

October 05, 2011 | About:

PetMed Express (NASDAQ:PETS) is an online and over-the-phone retailer of pet medications. Its returns on capital have been strong for over a decade. During the recent market turmoil, however, the stock has taken a dive; the stock is now down over 60% in the last year.

As a result, PetMed has a P/E (excluding its net cash balance) of just 7. Furthermore, this is a business with little in the way of capital requirements. As the company sells directly to consumers (or rather, the consumers' owners) online and over the phone, not only is no extensive distribution network necessary, but receivable balances are kept low as payments are made by credit card. This allows the business to generate strong cash flows that can then be passed on to shareholders.

And that's exactly what the company has been doing. In its last four fiscal years, the company has returned about $55 million to shareholders. (It's current market cap is $190 million.) In the first 1.5 quarters of this year, the company has returned another $17 million. With a net cash position of approximately $55 million, there is still plenty of more room for rewarding shareholders.

One reason management may be so shareholder friendly is the company's stock option plan: it doesn't have one. The company hasn't issued an option in many years, opting instead for a restricted stock plan. As a result, the company's CEO owns about $5 million worth of stock, against a salary of some $700 thousand. Managers are much more likely to be shareholder friendly when they are shareholders themselves!

Though returns in the past have been strong, however, the question on Mr. Market's mind appears to be whether the company can keep those returns high in the future. Customer acquisition costs are on the rise and prices are on the decline as the competitive environment heats up. For a great rundown of these and other issues, see Frank Voisin's article on this company.

Disclosure: No position

About the author:

Barel Karsan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.6/5 (5 votes)


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