Today's Buy Opportunity: PetMed Express

Welcome to "11 O'Clock Stock." Check back to Fool.com at 11 a.m. ET, and we'll be finding a new great stock every weekday for 50 days. Better yet, we’re so confident in the picks that we’re investing $50,000 of the Fool’s own money in them! To hear more about the series, click here to see a video from Motley Fool co-founder Tom Gardner. Can't make it at 11 a.m. ET? Come back to Fool.com, and we'll have the article in our Top Stories section 24 hours a day.

We all know that man's best friend is a canine -- but could Fido be man's best financial advisor, too? Well, probably not, but your furry pal can lead you to superior investment ideas. So sit ... stay ... and read on to find out why Fido and I think PetMed Express (Nasdaq: PETS  ) is better than a bowl full of Milk-Bones and Snausages.

Fast facts on PetMed Express:

Market Capitalization

$363.3 million

Industry

Your furry little friend -- pets

Revenue (TTM)

$235.5 million

Earnings (TTM)

$25.2 million

Source: Capital IQ (a division of Standard & Poor's). TTM is trailing 12 months.

We love our pets
The numbers are big:

  • 71 million U.S. households own a pet.
  • 62% of all U.S. households own a pet.
  • We spent $45.5 billion on our pets in 2009 and will spend $47.7 billion this year.

To put that in perspective, Americans will spend as much on pets in 2010 as the Dominican Republic will produce as a country. If Fidoland were a country, it would have the 74th largest gross domestic product, ahead of countries like Costa Rica and Jamaica (combined). With all silly comparisons aside, the point is that the pet market is bigger than Clifford and a potential gold mine for investors.

PetMed Express fills the prescription
Of the $47.7 billion spent on pets last year, $3.7 billion went toward medication. Ten years ago, this market was a near monopoly controlled by veterinarians. The model was simple: When you took Fido for a checkup, your vet would write a prescription and fill it right there. As a pet owner, you were a price taker because you didn't have any other way to fill the prescription.

Enter PetMed Express. The company operates an online and mail order pet pharmacy. Through its website, catalog, and unforgettable phone number (1-800-PetMeds), PetMed Express sells prescription and nonprescription pet medications, generally at prices well below what your vet charges. Typical of an online retailer, the benefit offered to customers is cost savings and the convenience of anytime ordering and home delivery. But PetMed Express goes even further -- it reminds you when Fido is running out of medicine and will call the vet for you to refill the prescription.

Pet owners have embraced and come to love the service PetMed Express offers. Sales, profits, free cash flow, and customer growth have been impressive over the years. Importantly, the company appears to be keeping existing customers happy (reorders make up 75% of sales) while focusing on attracting new customers and growing the business.

 

FY 2005

FY 2010

5-Year CAGR

Sales

$108.4

$238.3

17.1%

Net Income

$8.0

$26.0

26.6%

Free cash flow

($2.4)

$23.8

NM

New Customers

510,000

815,000

9.8%

Source: Capital IQ and company filings. Numbers in millions, except for customers.

Way back in 1996 PetMed began its quest to bust the vet monopoly. It took awhile to gain some traction, but the company now has 6% market share and getting larger. It dominates the mail order business -- all of its competitors only control 5% of the market. That's right, PETS is larger than all of its mail order competitors combined.

Beware the dog catcher
Let's not confuse a Chihuahua for a mastiff, though; vets still control 72% of the pet medication market. And since PetMed Express has generated a return on equity above 30% for each of the past nine years we shouldn't be surprised if competitors come around and start sniffing under its tail. Major sellers of nonprescription meds and other pet supplies, such as PetSmart (Nasdaq: PETM  ) , Wal-Mart (NYSE: WMT  ) , and Amazon.com (Nasdaq: AMZN  ) , are already competing with PetMed Express. However, PETS has the advantage of being a licensed pharmacy in all 50 states, which allows it to deal in prescription medications, where these others can't. The extra regulation that comes with being a pharmacy, combined with the 1-800-PetMeds brand and high customer satisfaction has built the company a competitive advantage. It is why PetMed is so much larger than its nearest direct competitor, Drs. Foster & Smith, and why I think it will be able to defend its niche against the big dogs.

Many investors disagree with this assessment; Shares of PetMed Express are heavily shorted. Even so, the company has the ability and wherewithal to back up its bark. With no debt, a long-tenured management team and a rabid customer base, The Motley Fool is ready to lift its leg and mark its territory by placing real cash behind PetMed Express. Check back to see how PETS and the other stocks in our "11 O'Clock Stock" campaign are faring.

Previous recommendations

Come back to Fool.com on Monday for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well! To see the performance of previous recommendations, click here.

"11 O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of Diageo. To see an FAQ on "11 O'Clock Stock," click here.

Wal-Mart Stores is a Motley Fool Inside Value recommendation. Amazon.com and PetSmart are Motley Fool Stock Advisor picks. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2010, at 11:07 AM, TMF42 wrote:

    Hey Fools!

    I'll be monitoring your comments closely for the next few days and would be happy to answer any questions you may have about PETS.

    I'm also interested in hearing from any of you who have used PETS in the past and how you like their service.

    Bryan (TMF42)

  • Report this Comment On July 30, 2010, at 11:27 AM, vgaymer wrote:

    Hi Bryan,

    Thanks for the insightful writeup. I've been eyeing PETS off and on now for a while. The numbers look great: lack of debt, growing revenue, initiation of a decent dividend. It's in a growing industry, in part, imho, because so many new medications are being developed and approved for pets.

    One thing that has me wary is the competition you mentioned. I really don't see evidence of a really strong moat. It also bothers me a little that I've heard of the stock but not the company per se. If I hadn't been running stock screens, I probably wouldn't have even heard of it. It makes me question their marketing.

    Cheers,

    G

  • Report this Comment On July 30, 2010, at 11:43 AM, TMF42 wrote:

    G -

    I understand your concerns about marketing. Here is my assessment on the company's marketing strategy:

    PETS management is EXTREMELY frugal. They do not like to part with their cash. This applies directly to their marketing strategy. The company only buys TV ad space (1) when it is cheap and and (2) when no one else wants it. They specialize in purchasing "remnant" ad space.

    The company's frugality can also be seen in the makeup of its ads: years ago they had Betty White as a spokesperson. They canned her becasue she had a resurgance in popularity and began to cost to much. Yup, they canned Betty White. Their new ads feature cartoon pets -- much cheaper.

    I would suggest inverting your thinking:

    It is a testament to the company's that they have grown the business like they have with only using pretty lousy advertising methods. It speaks to the fact that users love the service and that word of mouth has helped grow the reputation.

    Bryan (TMF42)

  • Report this Comment On July 30, 2010, at 11:59 AM, Fool2Prosperity wrote:

    For me, PetMed Express fails on both cost and service. Here's why: I have compared their prices to my vet's invoices. My vet has always been cheaper than 1-800-PetMeds whenever I have checked over the past few years. Plus I get what my pets need immediately with no shipping costs. (Disclosure - I am a huge fan of online shopping for the convenience and/or savings.) With today's economy and the predictions for somewhat changed purchasing behavior, I think more people are checking costs, willing to support a local business and happy to have their pet meds when they walk out the door. All of which combines into a bad trend right now for PETS.

  • Report this Comment On July 30, 2010, at 12:22 PM, Fool2Prosperity wrote:

    As I was writing my earlier comment, Bryan (TMF42)'s marketing note came in. Why waste money buying space/time that no one wants? There is usually a good reason no wants it. Frugal is good; cheap is dumb. If I and most customers/prospects are not reached via the purchased space/time, I'm not going to have you in my mind and I'm not going to remember to buy you. Especially if the only time I am buying pet meds is once a year for a healthy pet's annual checkup (stock up on flea protection, heartworm, etc). (Disclosure - I have one healthy pet and one less healthy pet that requires meds on a regular basis.) I'll keep my eye on PETS but now I know it is definitely not the right buy for me based on your article and comments.

  • Report this Comment On July 30, 2010, at 12:35 PM, Tygered wrote:

    Thanks for the recommendation. I use 1-800-petmeds but like others here I didn't even realize it was publicly traded and can only recall a couple of commercials for them. In fact, I remember the Betty White commercials (full disclosure, I'm old enough to remember her on Golden Girls.)

    I like this one because it is in my price range unlike the others listed in this 50 day program. Therefore, I bought a couple hundred shares and we'll see how it goes.

    Thanks again.

  • Report this Comment On July 30, 2010, at 1:23 PM, Fool2Prosperity wrote:

    I very much agree with Tygered in terms of the price point. I would like to see stocks in this "50 Days" series that are in $20 and lower. ($10 would be even better ;-) I buy individual stocks in that range more often -- and follow the Lynch philosophy of "invest in what you know". I appreciate the Motley Fool for the info and everyone's comments, especially when they have/had a direct interaction with the company.

  • Report this Comment On July 30, 2010, at 1:23 PM, TMF42 wrote:

    Fool2Prosperity:

    I'm with you on the "penny wise, pound foolish" argument. I wish PETS would do MORE advertising rather than less, even if it meant a temporary crimp in margins.

    Let me clarify - I don't think their marketing strategy is dumb. The are keenly aware of the audience they are trying to target (which happens to be women, age 30-65). They are quite effective given the effort (or lack of) that they put into this.

    CEO Menderes Akdag has a ton of experience in remnant advertising. It adds to my conviction that he has esentially monitored ad pricing on a daily basis for well over a decade or two.

    If I were running the company I'd probably investigate some sort of ad blitz. But, I'm not running the company, and all told, Akdag and crew have done a good job.

    Bryan

    TMF42

  • Report this Comment On July 30, 2010, at 2:48 PM, lctycoon wrote:

    One reason might be that you need to buy 100 shares to be able to use a covered call options stategy. It's a lot easier to buy a 100 shares of a $10 stock ($1000) than 100 shares of BRK-A, for example.

  • Report this Comment On July 30, 2010, at 3:32 PM, stan8331 wrote:

    The marketing strategy is questionable, but I don't think the remnant option is entirely without merit. I think the larger issue that the opportunity for this company to grow will be extremely limited if it can't offer a fairly large discount over what people pay for meds at their vet. If the business model is to only offer a very slight discount or none at all versus vet pricing, you can forget about major growth because it's a heckuva lot easier for most folks to just get the meds at the vet while you're there.

  • Report this Comment On July 30, 2010, at 5:26 PM, TMF42 wrote:

    stan8331:

    Good point.

    It appears the company is engaging ini marginally underpricing their products relative to vets. While vets have been slow to respond, they have begun to lower prices and they will most likely continue to do so.

    If current "fat" margins turn into just "pretty good" margins in the future, I still think we'll be okay.

    PETS is also actively trying to strike deals directly with manufacturers to get product cheaper and avoid distributors. This strategy is slow in developing due to legacy contracts and may never materialize.

    Let's not forget about convenience either. That does have some value.

    Bryan

    TMF42

  • Report this Comment On July 30, 2010, at 6:08 PM, Fool2Prosperity wrote:

    Hi Eric (TMFRhino / TMFElevenOClock) -

    Here are my 2 primary reasons for liking lower-priced quality stocks:

    1) emotional: I get more shares for the same gross cost ($1500 = 100@$15 = 10@$150). I know it is "the same" but I "feel" like I am getting more for my $. I acknowledge my emotions and try to overcome them with diligence in stock research both in entry and exit plans.

    2) my own historical experience: in reviewing my current portfolio, when those less expensive and good quality stocks rise, they increase percentage-wise a greater amount and often faster than the higher-priced quality stocks. I also watch for when they stall/pull back or they no longer fit my ideals and decide if it is time for a full or partial exit.

    Disclosure - I research, buy, then hold for a long time while watching like a hawk and checking if a company is still worthy of my investment. I have bought companies in 2010 that ranged in price from $78/share (currently up 8.67%) and $0.73 (currently up 41.35%). The rest ranged in price from $3.66 - $15.28 (and those are all also up from 5%-17%). I may buy several stocks in a short amount of time and then nothing for months until I find something that fits my strategy, budget and comfort level. I also invest regularly with a financial advisor. Out of my current personal 14 holdings, today 11 are up, 3 are down and my total unrealized losses are $215 (including entry commissions).

    As I get more experienced and comfortable with myself and the volatility in the investment arena, I plan to shift more dollars to my direct control, hopefully do well and save on fees. The Motley Fool is a great resource for me. I have gotten a bit long-winded here but I don't want to misrepresent any info. Of my 14 stocks, 1 was bought in 2001, 1 in 2007 (I didn't even look at individual stocks from 2002-2006) and the remaining 12 between October 2009 and July 2010. I don't want my trade costs to be too great of a percentage eating into my profits so I now spend $1000 per buy on stocks I feel secure in purchasing, $250-$500 on a more speculative purchase. I was buying lesser amounts until I looked at the percentage that trades were costing me and what it would take to recoup those fees.

    Hope this encourages all of you writers for Motley Fool to discover more of those under $25 stocks for us!

  • Report this Comment On July 30, 2010, at 6:08 PM, Fool2Prosperity wrote:

    Thanks stan8331 -

    Well said!

  • Report this Comment On August 02, 2010, at 5:20 AM, KurtEng wrote:

    I own shares of PETS, but I'm starting to get a little worried about the competition. I should also state that I don't own a pet. I compared prices for a few products on Amazon and Petmed, and Amazon was cheaper. Do you think that PETS can compete with Amazon prices and brand recognition in the long run?

  • Report this Comment On August 03, 2010, at 1:10 AM, CommonStockSense wrote:

    Hello Bryan,

    Nice summary of the PETS story.... I was long the stock until post the earnings disappointment, which brought me to rethink my positive thesis. This is where I came out: I still like the company's well-recognized brand, asset-light-high-ROIC business model, iron clad balance sheet, reorder business, excellent free cash flow, and now enhanced 3.1% dividend. However, we must acknowledge that negative Y/Y revenue trends (a new development) and margin pressures bring material risk to our and Street forward estimates, which suggests potential for further multiple compression at 15 times trailing earnings.... For the time being, I moved to the sidelines and will keep tabs on fundamentals. Like others here, I'm concerned about competition. I include full details on my blog here:

    http://www.commonstocksense.com/2010/08/petmed-express-pets-...

    Any and all feedback is welcome.

    Br,

    Jeff

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1252907, ~/Articles/ArticleHandler.aspx, 11/27/2014 12:44:49 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement