Speculative Buy - PetMed Express Inc. (PETS)
We have a speculative idea for interested parties, Petmed Express (PETS). We remind you that these types of investments are extremely risky, and our opinion is just that, an opinion and not a recommendation. Any action you take, is your decision and you bear all related risk. This investment may not be appropriate for you and you should consult your financial advisor before acting.
That said, we have been following this company for a while and like its position heading into its EPS report this Monday morning. The company is the largest player in the pet pharmaceutical retail sales market. It competes mainly with veterinarians, and we believe has about half of the online business of pet pharmaceuticals, which make up approximately 9% of the overall market.
Revenue growth has been strong over its short life, and margins have been expanding. We are not going to get into the validity of the business here in too much detail, but perhaps another time. The market closes in a half hour, and we want to provide you with our thoughts on the trade. Investing in the stock over the long term, we view as a good idea, but we are talking about the short short trade now.
There are some red flags to consider. The consensus estimate came down a penny this past week, and one analyst downgraded the stock to market outperform from buy in September. However, the analyst does not seem to have a good bead on the stock, having initiated his buy recommendation not far from the peak. We believe he has become nervous or is being pressured by a superior. We have seen this in our own experience, and it is truly a shame for investors.
Another red flag was exposed last quarter. The cost of acquiring new clients through advertising increased last quarter, and new customer additions did not grow over the prior year period. It's possible that rising ad costs due to the coming elections could draw some narrow-minded analyst focus on Monday, and they could miss the big picture. However, the company is generating strong repeat business with a focus there. Also, the company has made the strategic decision to stop sales to wholesale customers, and margins have improved as a result. Economic value is likely being added through investment in generating new retail business, and removing focus from the less profitable wholesale opportunity.
Why we like it going into the EPS report. Valuation and a solid EPS history. The stock was recently beaten down on a Barron's article concerning a lawsuit and the personal history of one of the company's founders who is no longer involved with the company. This is a nonoperating issue and should hold no weight. We like the stock's price movement since the end of the quarter, and we suspect the more recent price movement downward is reflective of concern going into the report. Our bet and risk is that it is unwarranted and we are looking for a positive report.
That said, we have been following this company for a while and like its position heading into its EPS report this Monday morning. The company is the largest player in the pet pharmaceutical retail sales market. It competes mainly with veterinarians, and we believe has about half of the online business of pet pharmaceuticals, which make up approximately 9% of the overall market.
Revenue growth has been strong over its short life, and margins have been expanding. We are not going to get into the validity of the business here in too much detail, but perhaps another time. The market closes in a half hour, and we want to provide you with our thoughts on the trade. Investing in the stock over the long term, we view as a good idea, but we are talking about the short short trade now.
There are some red flags to consider. The consensus estimate came down a penny this past week, and one analyst downgraded the stock to market outperform from buy in September. However, the analyst does not seem to have a good bead on the stock, having initiated his buy recommendation not far from the peak. We believe he has become nervous or is being pressured by a superior. We have seen this in our own experience, and it is truly a shame for investors.
Another red flag was exposed last quarter. The cost of acquiring new clients through advertising increased last quarter, and new customer additions did not grow over the prior year period. It's possible that rising ad costs due to the coming elections could draw some narrow-minded analyst focus on Monday, and they could miss the big picture. However, the company is generating strong repeat business with a focus there. Also, the company has made the strategic decision to stop sales to wholesale customers, and margins have improved as a result. Economic value is likely being added through investment in generating new retail business, and removing focus from the less profitable wholesale opportunity.
Why we like it going into the EPS report. Valuation and a solid EPS history. The stock was recently beaten down on a Barron's article concerning a lawsuit and the personal history of one of the company's founders who is no longer involved with the company. This is a nonoperating issue and should hold no weight. We like the stock's price movement since the end of the quarter, and we suspect the more recent price movement downward is reflective of concern going into the report. Our bet and risk is that it is unwarranted and we are looking for a positive report.
We expect solid cash generation to allow the debt-free PETS to eventually control options related dilution and even impact EPS if it so chooses through the investment in its own shares. We have noticed some big buys during the past couple days when the stock has reached specific points, but it is likely investment from institutions.
Let's talk valuation. Currently, at $11.36, the stock trades at a P/E multiple of 19X its $0.60 fiscal 2007 (Mar) estimate. EPS growth is estimated at 20% in FY 07 and 23% for FY 08. EPS growth for this quarter is seen at 18%, to reach $0.13. Keep in mind, it was $0.14 just a week ago, and we believe the decrease is the result of a nervous analyst, and not whispers from the company down to analysts. Only five analysts are listed as following the stock, but its rise to the $20 area in recent times was supported by increasing institutional ownership. That has steadied now. The stock trades at 15X FY 08 (Mar). According to Yahoo's compilation, the stock has a history of meeting or exceeding estimates. We view it as a sweet stock at a sweet time in terms of valuation. The catalyst is the earnings report, and owners are highly levered to it over the short term. The November $12.50 Call recently rose due to demand and weak open interest, from $0.35 to $0.50 in two days prior to the report, so on neutral news, there is some premium that could be lost. However, we believe that a positive report, perhaps a $0.02 to $0.05 beating of the consensus estimate, could recharge lift in this stock and bring attractive returns to shareholders and call option contract holders. Our best to you!
Let's talk valuation. Currently, at $11.36, the stock trades at a P/E multiple of 19X its $0.60 fiscal 2007 (Mar) estimate. EPS growth is estimated at 20% in FY 07 and 23% for FY 08. EPS growth for this quarter is seen at 18%, to reach $0.13. Keep in mind, it was $0.14 just a week ago, and we believe the decrease is the result of a nervous analyst, and not whispers from the company down to analysts. Only five analysts are listed as following the stock, but its rise to the $20 area in recent times was supported by increasing institutional ownership. That has steadied now. The stock trades at 15X FY 08 (Mar). According to Yahoo's compilation, the stock has a history of meeting or exceeding estimates. We view it as a sweet stock at a sweet time in terms of valuation. The catalyst is the earnings report, and owners are highly levered to it over the short term. The November $12.50 Call recently rose due to demand and weak open interest, from $0.35 to $0.50 in two days prior to the report, so on neutral news, there is some premium that could be lost. However, we believe that a positive report, perhaps a $0.02 to $0.05 beating of the consensus estimate, could recharge lift in this stock and bring attractive returns to shareholders and call option contract holders. Our best to you!
posted by The Greek | 3:13 PM
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