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Watch out PetSmart, Inc.: PetMed Express, Inc. Is The Best Way To Cash In On The Boom In Pet Spending

Pet pharmacy PetMeds Express  (NASDAQ: PETS  ) could very well be a diamond in the rough. With a market capitalization of just $250 million, PetMeds very likely flies under your radar. However, it would be a mistake to overlook it just because of its small size. The reason for this is that the company operates in a highly lucrative industry and holds a solid track record of growth over the past several years. In addition, PetMeds rewards its shareholders with a very high dividend yield and the stock trades for a reasonable valuation.

As a result, if you're looking for a company in a gold mine of a business with lots of room for growth and a compelling dividend, look no further than PetMeds.

Cashing in on man's best friend
The amount of money Americans spend on their furry companions is truly staggering. The Bureau of Labor Statistics reported last year that nearly 75% of U.S. households own pets. In all, there are about 218 million pets in the United States, and as is the case with every living thing, health care is a basic need for them. On average, U.S. households spend around $500 each year to care for their pets. In all, Americans fork over more than $61 billion dollars on their pets every year.

Put simply, the pet care industry is a gold mine. Pet owners are entirely willing to shower their pets with all of the care they need, and they will shell out the cash to do so. This is why PetSmart  (NASDAQ: PETM  ) was so successful last year. PetSmart delivered 4% sales growth and 19% earnings growth last year. Going forward, PetSmart expects 2014 to be a solid year as well. Management guidance calls for 5% sales growth and at least 10% earnings growth.

It's true that PetSmart and PetMeds are competitors, but that doesn't mean they can't co-exist. There's more than enough cash to go around, thanks to the fact that people will usually do whatever is necessary to care for their pets. Also, thanks to PetMeds' status as a direct marketer, it can offer prices that are competitive with those of veterinarians and big-box retailers like PetSmart.

Solid track record of performance
PetMeds has done a solid job of growing sales and profits over the past several years. Last year, the company produced 2% sales growth and 4% profit growth. While that doesn't sound too impressive, PetMeds' longer-term track record of growth has proven to be slow but steady. This is true of the company's dividend payments as well. Since it instituted its dividend in August 2009, PetMeds has increased its payout three times to its current level of $0.68 per share annualized.

Over the past four years, the company has increased its dividend by about 14% compounded annually. At its current level, PetMeds provides a hefty 5.3% dividend yield, which means investors are getting their fair share of cash flow.

Moreover, PetMeds has a rock-solid balance sheet. At the end of the last quarter, PetMeds held $33.8 million in cash and short-term investments on its books. That boils down to about 13% of the company's market capitalization. That provides a nice cushion. Not only that, the company carries very little debt. PetMeds has only $8.1 million in total debt and more than $78 million in total assets.

In addition, the stock trades at a very reasonable valuation. PetMeds exchanges hands for just 14 times trailing earnings and 12 times forward earnings. In combination with its extremely high dividend and cash hoard, there are several margins of safety built into PetMeds at these levels.

The Foolish takeaway
Americans spend a boatload to keep their pets happy and healthy, and that means big business for PetMeds Express. It stands to reason that the business should remain profitable for a long time to come, unless people stop the age-old practice of keeping domesticated animals. That doesn't seem likely.

What makes PetMeds so attractive isn't just its industry. The company is solidly profitable, maintains a well-capitalized balance sheet, and rewards its investors with a hefty dividend. At its current valuation, PetMeds looks like a Foolish opportunity.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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