Speculative Buy - PETS (Update)
Congratulations to investors who ventured capital into our idea from Friday. We suggested a speculative idea for the short-term trade was PetMed Express (PETS). We indicated the Monday morning EPS release could be a catalyst for an attractively valued stock. We invested ourselves in the Nov 12.50 Call options, and we closed out our position today. The last trade on the calls on Friday was at $0.50 a contract and today was $0.90. PETS stock itself rose 11.5% today. We believe the short-term opportunity is over now, and if investors intend to hold it longer, a better idea might be holding the shares rather than options. (disclosure)
Regarding the EPS report itself, it was not all that good. Revenues were impacted for the second quarter in a row by the strategic decision of management to reduce less profitable sales to wholesale clients. Wholesale revenues were down approximately $1 million from the prior year period result. We view this as a long-term value added decision, allowing the company to apply capital toward more profitable investment opportunity in the retail market. New customer additions were relatively weak for the second quarter in a row, when compared to the prior year period. Reorder growth rate was down on a sequential quarter basis. We really could not find a lot of positives in the report, and we even felt like we could manage PETS better than its current management seems to be doing. That's besides the point.
So, why did PETS rise today? Reuters called us and asked the same question, and here's what we told them. Heading into the report, the stock had been beaten down partly on a Barron's article about one of the early participants in the company, his lawsuit against PetMed Express, and his personal background. These are all non-operating issues and should not hold weight over time, as long as there are good people managing the company now. However, investors do not like risk, and a new one had appeared. So, when the company reported no new surprisingly bad news today, we believe the stock was poised to benefit from that alone. No news was in fact good news. The value of PETS going into the report was about 19X FY 07 (Mar) consensus estimates and 15X FY 08. This contrasted with 21.5% anticipated long-term growth, referring to Yahoo's & Thompson Financial's work on analysts' consensus estimates. We view that PEG ratio or P/E to growth comparison attractive for investment. PETS also beat estimates by a penny a share, but that estimate had decreased by a penny over the 7 days prior to the report, according to Yahoo! and ThompsonFN again.
The good news for long-term investors is that after March, wholesale revenue impact should be gone from the comparable numbers, and revenue growth will rely more on reorder sales and new client sales. Also, as the mid-term elections pass, the cost of advertising should decrease, benefiting PETS' margins. PetMed is building a cash store and we would like to see it use it to acquire a smaller competitor at the right price or to repurchase shares and invest in advertising and customer retention. However, that is a question shareholders should pose. We are cashed out.
We hope to provide you some more "Speculative Buys" later this week, so stay tuned.(disclosure)
Regarding the EPS report itself, it was not all that good. Revenues were impacted for the second quarter in a row by the strategic decision of management to reduce less profitable sales to wholesale clients. Wholesale revenues were down approximately $1 million from the prior year period result. We view this as a long-term value added decision, allowing the company to apply capital toward more profitable investment opportunity in the retail market. New customer additions were relatively weak for the second quarter in a row, when compared to the prior year period. Reorder growth rate was down on a sequential quarter basis. We really could not find a lot of positives in the report, and we even felt like we could manage PETS better than its current management seems to be doing. That's besides the point.
So, why did PETS rise today? Reuters called us and asked the same question, and here's what we told them. Heading into the report, the stock had been beaten down partly on a Barron's article about one of the early participants in the company, his lawsuit against PetMed Express, and his personal background. These are all non-operating issues and should not hold weight over time, as long as there are good people managing the company now. However, investors do not like risk, and a new one had appeared. So, when the company reported no new surprisingly bad news today, we believe the stock was poised to benefit from that alone. No news was in fact good news. The value of PETS going into the report was about 19X FY 07 (Mar) consensus estimates and 15X FY 08. This contrasted with 21.5% anticipated long-term growth, referring to Yahoo's & Thompson Financial's work on analysts' consensus estimates. We view that PEG ratio or P/E to growth comparison attractive for investment. PETS also beat estimates by a penny a share, but that estimate had decreased by a penny over the 7 days prior to the report, according to Yahoo! and ThompsonFN again.
The good news for long-term investors is that after March, wholesale revenue impact should be gone from the comparable numbers, and revenue growth will rely more on reorder sales and new client sales. Also, as the mid-term elections pass, the cost of advertising should decrease, benefiting PETS' margins. PetMed is building a cash store and we would like to see it use it to acquire a smaller competitor at the right price or to repurchase shares and invest in advertising and customer retention. However, that is a question shareholders should pose. We are cashed out.
We hope to provide you some more "Speculative Buys" later this week, so stay tuned.(disclosure)
posted by The Greek | 4:35 PM
0 Comments:
Post a Comment
<< Home