Established in 1996, PetMed Express (NASDAQ:PETS) is a leading direct-to-customer marketer of prescription and non-prescription pet medications in the U.S., especially medicines for dogs, cats and horses. The company's stock has grown over 30% year-to-date.
There are lots of interesting things about PetMed, but the most interesting one is the fact that even as a small-cap stock it offers investors an impressive dividend yield of 4.6%. PetMed makes money for investors, pays enviable dividends, and at the same time maintains zero debt as of the end of the 2013 fiscal year.
A little about PetMed Express and its business
PetMed Express operates as 1-800-PetMeds. Apart from the prescription and non-prescription medications for pets, it also markets other health products and treats for dogs and cats, including flea and tick preventatives. It markets its products through online, direct mail, and print advertising campaigns, and serve customers through the company's website and 800-number.
Over the years, the company has worked relentlessly to increase awareness of its brand name, "1-800-PetMeds." It has achieved significant success with this, as its Customer Service Measurement results show. Its total accumulated customers have increased approximately 830% from full-year 2009 to full-year 2013. Presently, it serves over 7 million customers.
With its establishment in 1996, the pet medication monopoly that has been consistently enjoyed by veterinarians was broken, as PetMed offers its products at over 20% discount compared to vet prices. Added to the mix is the convenience, ease of ordering, and swift home delivery that PetMed offers its customers.
Top reasons why you should take a position
There are several reasons that make PetMed a good investment:
Impressive yield: The company pays an impressive dividend yield of 4.6% when very few small cap companies are paying up to 3%-3.5% yields on the average. The dividend increase has been on an uptrend since it started paying dividends. In December 2012 (which is part of fiscal 2013), PetMed paid a one-time special dividend of $1.00 per share, and in all paid approximately $32.0 million in dividends.
Share buy backs: It buys back shares as another way of showing investors how much they are valued by PetMed's management. In fiscal 2013 (ended March 31, 2013), PetMed bought back shares valued at approximately $3.9 million at an average price of $9.74 per share.
Solid balance sheet: The company maintains a solid balance sheet that is devoid of any short-term or long-term debt as of the end of fiscal year 2013.
Significantly discounted: It is trading at a price that is over 80% below that of its closest competitor. Its shares are currently trading at 16.26 times, while those of MWI Veterinary Supply (UNKNOWN:MWIV.DL) are trading at approximately 34.39 times.
Impressive profit margin: PetMed maintains significant gross profit margin of 33.9%. With its current expansion plans and sales of higher-margin items, there is room for further growth as well.
Catalysts for growth
Below are some of the catalysts that will fuel PetMed's growth going forward:
Significant number of dog and cat owners in the US: From a survey carried out by the American Pet Products Manufacturers Association, over 56 million U.S. households own dogs. This is followed closely by cat ownership at approximately 45 million households.
Increased spending on pet medication: The same survey showed that approximately $53.33 billion was spent on pets in the U.S., with approximately $12.65 billion spent on supplies and OTC medication. The projected spending for 2013 is $55.53 billion, with approximately $13.21 billion projected to go into supplies/OTC medication.
Increasing number of aging baby boomers: The need for social involvement has led to approximately 46% of senior citizens having pets. The trend is expected to continue through 2030.
Establishment of direct purchasing arrangements: This will further boost the company's bottom line, since direct purchasing from manufacturers minimizes the cost of purchase.
Increases in new orders and repeat sales: In an uptrend, the company's new order sales increased 8.4% in fiscal 2013 in comparison to the year before. The same trend applied to repeat orders.
Growing among competitors
As mentioned earlier, PetMed's closest competitor is MWI Veterinary Supply. With a market cap of approximately $2.12 billion and PetMed at $295.25 million, its products are offered direct to veterinarians, while PetMed offers its products direct to customers. MWI Veterinary Supply's shares have also have their own share of run in the stock market, having recorded growth of approximately 50.8% year to date. MWI, even at its market value, does not pay dividends.
Another competitor is PetSmart (UNKNOWN:PETM.DL), a pet supplies retailer with market cap of $7.55 billion. PetSmart's stock trades at 18.80 times its P/E, and the company currently pays a dividend of 0.78 with a yield of 1.10%. PetSmart has its foot in multiple markets, including the U.S., Puerto Rico, and Canada. The company recently lowered its third quarter 2013 comps sales guidance from 3-4% to 2.2-2.5%. This is attributed mostly to lower traffic counts.
Risks that might inhibit growth
Some of the risks for PetMed include:
- Increased competition from both large and small companies.
- Manufacturers' suspension of key products.
- Minimal market share.
- Increased heavy spending on adverts.
Although PetMed's sales declined 4.4% at the end of fiscal 2013, this is mainly attributed to manufacturer's suspension of production of several key products. Despite this, the company's stock still makes a good addition to an investment portfolio. Trading at P/E of 16.21 in an industry with average P/E of approximately 21.81, it is cheap.
Add to this the fact that while its industry's dividend yield average is 1.15%, PetMed yields approximately 4.65%, and you have a stock that is worth holding on to. With its efforts to further boost sales, expand its product line, and concentrate more on sales of higher-margin items, PetMed will continue to increase its profit margin.
Naomi Warmate-Igwe 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.