Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does PetMed Express (PETS -1.94%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell PetMed's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at PetMed's key statistics:
PETS Total Return Price data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
(1%) |
Fail |
|
Improving profit margin |
(27.8%) |
Fail |
|
Free cash flow growth > Net income growth |
(21.3%) vs. (28.6%) |
Pass |
|
Improving EPS |
(18.9%) |
Fail |
|
Stock growth (+ 15%) < EPS growth |
16.1% vs. (18.9%) |
Fail |
Source: YCharts. *Period begins at end of Q2 2010.
PETS Return on Equity data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(6.7%) |
Fail |
|
Declining debt to equity |
No debt |
Pass |
|
Dividend growth > 25% |
36% |
Pass |
|
Free cash flow payout ratio < 50% |
168.8% |
Fail |
Source: YCharts. *Period begins at end of Q2 2010.
How we got here and where we're going
PetMed doesn't quite come through with flying colors, as it's mustered only three out of nine possible passing grades -- one of which was more a technicality than anything. Over the past three years, the company's key bottom-line metrics have been falling due to high customer acquisitions costs, which may not be able to support its shareholders distribution if the trend continues. In addition, PedMed has also struggled to boost its revenue growth due to fierce competition in its niche. Will PetMed be able to refill its prescription for growth, or is this pet pharmacist running out of juice? Let's dig a little deeper.
More than 60% of U.S. households have a pet, and this total includes 165 million dogs and cats. The total pet market surged by 6% to $53 billion in 2012, according to the American Pet Products Manufacturers Association, and a growing amount of that spending is flowing toward pet health -- over-the-counter medication spending increased by 7% to $12.7 billion last year. Fool contributor Rupert Hargreaves notes that the rising demand of animal treatments will increase the demand of animal health products in the market. In addition, some lawmakers in the U.S. government has proposed giving pet owners a tax credit of up to $3,500 for qualified pet care costs, which could certainly incentivize pet ownership the near future.
The trend toward pet ownership appears set for further growth, which should provide PetMed with all the impetus it needs on the bottom line, particularly as American pets start exhibiting more of their owners' unhealthy traits. According to the Association of Pet Obesity Prevention, some 80 million pets in the U.S. are overweight or obese, which points the way toward pet weight-loss products (there are even FitBit clones for dogs now, but PetMed doesn't sell them -- yet). Zoetis's canine anti-obesity pill, Slentrol, could pose a problem for PetMed, as the company does not carry it on its site, and if the furor over human weight-loss pills is any indication, the canine pill counterpart could be extremely popular.
PetMed also faces fierce competition from larger competitors like PetSmart (PETM), as well as from other pet-medicine specialists. PetMed has increased its investments in the television advertisement space to improve its mind share, and this appears to be working in some small way: the company added 10,000 new customers in its latest quarter, capturing a small slice of PetSmart's pet medication business. But PedMed could achieve superior growth if acquired by PetSmart, which has the superior brand name and distribution network necessary to capture the rest of the pet medicine market. This would disappoint long-term holders of PetMed if they aren't compensated with PetSmart shares, but if PetMed can't find a way to grow its share price through increased earnings rather than a higher valuation, its recent gains may turn out to be the best today's investors can expect.
Putting the pieces together
Today, PetMed Express has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
