Is the PetMed Express Sell-Off an Opportunity?

The Web-based pet medication and supplies company has plenty of growing to do, despite anemic figures in the short term.

Jan 24, 2014 at 5:15PM

When a company has all of the right buzzwords to be a "hot stock," market myopia can often go into overdrive. PetMed Express (NASDAQ:PETS) taps into multiple areas that investors and analysts can't get enough of: pet-care products, e-commerce, and pharmacies. While it's great to have industry tailwinds at your back, it can also set you up for some short-term rockiness, as PetMed Express experienced during this week's earnings announcement. PetMed's website, 1800Petmeds.com, enjoys a comfortable competitive moat from its peers and delivers products to consumers who are tired of their local veterinarian's drug prices. Does the recent quarter's revenue miss justify the sell-off, or is this an opportunity to buy shares on sale?

Earnings recap
It wasn't the most glamorous earnings report for PetMed, as the company reported top-line sales that fell short of analyst expectations and a bottom line that came in nearly flat with the year-ago quarter.

The company brought in $4.5 million in profit -- $0.23 per share. The year-ago number was actually slightly higher -- $4.6 million (and again, $0.23 per share). Analysts were on the button with expectations.

Sales rose 1% to $50.1 million. Analysts wanted nearly $52 million. Driving sales higher were slightly large average transactions ($72 versus $71) as well as reorder sales, which climbed 3.6. In an ultracompetitive business such as this, seeing increasing recurring revenue is a great thing.

Upon the release, the market proceeded to sell off nearly 6% of the company's public value.

Pros and cons
There are plenty of reasons to love this company. Besides its aforementioned market position, the company has a rock-solid balance sheet with hardly a penny in the debt department and nearly $71 million in current assets (about one-quarter of its market value). This helps give the company its attractive 8.2 times EV/EBITDA. It's a richer number than that of brick-and-mortar pet services company PetSmart, which trades at 7.8 times, but PetMed has a leaner operating model and arguably a more attractive business. On a forward P/E basis, PetMed trades at just over 15 times, whereas PetSmart hovers around 14.2 times.

The biggest threat to this company is retailing giants. Wal-Mart is growing its pet-services business (it even offers insurance) and has the ability to match or beat the already aggressive pricing at 1-800-Petmeds. PetSmart is also pushing its own omnichannel retailing strategy, which includes a greater push into online sales. On the ground, PetSmart has a much larger name than 1-800-Petmeds, and this brand dominance could carry over into the e-commerce sphere.

This week's sell-off does appear to be the typical market overreaction, and PetMed will certainly continue to grow with more people owning pets and, thus, more spending on pet goods and services. The company appears fairly valued at this point -- not startlingly cheap and by no means overpriced. For bargain hunters, the sell-off didn't mitigate much of the downside risk, so value seekers may pass here. But for those interested in growth stocks (with the bonus of a 4.5% dividend yield), this stock could be the cat's meow.

An opportunity to start your year off right
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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends PetSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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