We found a bullish thesis on PetMed Express, Inc. (PETS) by Tiny Stock Ninja on Tiny Stock Ninja’s Substack. This article summarizes the bull’s paper on PETS. PetMed Express, Inc. stock is trading at $3.9 as of October 23rd.
A pharmacy counter with a variety of pet medicines.
PetMed Express, Inc. (NASDAQ: PETS) is entering a potential turnaround after years of underperformance. The company has historically had a cash-generating pet wellness business, but has struggled recently due to mismanagement and increased competition. But with a new management team in place, led by CEO Sandra Campos, there are signs of renewed focus and operational improvements. Campos, who took over in April 2024, quickly returned the company to GAAP profitability within two months, suggesting the company may be on the road to recovery. PetMed Express sells a variety of pet products, including prescription drugs, supplements, food and other consumables, and has continued to play an important role in the pet care industry for nearly 30 years.
Founded in 1996, PetMed Express initially built its business by providing a cost-effective alternative to veterinarians who charged high prices for pet medications. By 2005, more than half of its sales were coming online, and the company developed a reputation as 1-800-PETMEDS through catalogs and television marketing. Over the years, the company’s core business has remained relatively stable, with flea, tick, and heartworm treatments accounting for a large portion of its revenue. Despite increasing competition, especially from companies like Chewy, PetMed Express continues to offer a competitive product line.
Under the previous CEO, the company experienced failures such as operational inefficiencies and strategic misalignment, with the PetCareRX business coming into direct competition with its core brands. Campos immediately addressed these issues, focusing on customer retention and optimizing marketing efforts. Her strategy has shifted to a balanced approach to customer acquisition and retention, while also exploring logical additions to the company’s core prescription business.
Two key initiatives being prioritized are AutoShip and private label prescription expansion. AutoShip, which accounts for 56% of PetMed’s business, is seen as a growth area, and the company is introducing new features to make the service more flexible for customers. Private label initiatives are also promising because they offer higher profits and cost savings for customers. Mr. Campos has worked with the company’s Veterinary Advisory Board to align product offerings to consumer needs, focusing on chronic pet health issues and preventive care.
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Financially, PetMed Express remains a high cash generating business with minimal capital investment. Despite the challenges of the past few years, the company still has $46 million in cash, no debt, and is financially stable. Although inventory levels fluctuate due to opportunistic purchasing, sales have averaged 7.5x over the past 10 years, indicating sound inventory management. Revenue has remained relatively flat since 2019, hovering around $280 million annually, but saw a temporary increase during the pandemic. Campos’ efforts to cut costs and refocus on its core business are already yielding positive results, although gross profit margins have stabilized at around 27% to 28% in recent years after facing pricing pressure from competitors. . In fact, in the first two months, she was able to significantly reduce general and administrative expenses, reducing them to $4.9 million from $15.7 million a year earlier, including the cancellation of stock-based compensation.
Looking ahead, the market opportunity for PetMed Express remains significant. The pet wellness industry has experienced continuous growth over the past two decades, with U.S. spending on veterinary care and pet medicine reaching $38.3 billion by 2023. This expanding TAM (Total Addressable Market) market provides ample scope for PetMed in particular to capture a larger share. It can take advantage of operational improvements initiated under Campos.
PetMed Express (PETS) currently trades at approximately 5.5x trailing-twelve-month earnings and annualized EPS of $0.72. The company’s earnings have so far ranged between 12 and 22 times, suggesting the potential for significant upside. A conservative multiple of 12x would give the stock a price of $8.64, a return of 117%. Alternatively, using the EBITDA multiple, PETS could achieve $27 million in EBITDA, assuming a 10% margin on $270 million in revenue. Applying a 6x multiple would still give the stock about 100% upside potential. Recent acquisitions in the pet industry have valued companies at 15x EBITDA, and rumors of a potential sale are pushing valuations even further. Risks include intense competition and new management, but the company has already shown profitability and cost savings.
PetMed Express has growth potential by focusing on core pet pharmacy services and effectively managing costs. By optimizing operations and focusing on core competencies, the company can deliver significant returns to investors. That being said, when I heard the latest financial results, it didn’t seem like the company would be profitable anytime soon. They blamed “macroeconomic pressures” for the 13% decline in sales, and EBITDA was negative for the quarter.
PetMed Express, Inc. isn’t even on our list of 31 most popular stocks among hedge funds. According to our database, 17 hedge fund portfolios held PETS at the end of the second quarter, compared to 14 in the previous quarter. While we recognize the risks and potential of PETS as an investment, we believe that some AI stocks are more likely to deliver higher returns and in a shorter time frame. If you’re looking for AI stocks that are more promising than CL, but are trading at less than 5x P/E, check out our report on the cheapest AI stocks.
Read next: Analysts see new $25 billion ‘opportunity’ in NVIDIA and 10 blue-chip stocks to buy in Q3 2024, according to Bank of America.
Disclosure: None. This article was originally published on Insider Monkey.
