Why Huge Gains May Be Ahead for PetMed Stock

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PetMed Express Is a Dog That Needs Some Love

The online retail space is dominated by Amazon.com, Inc. (NASDAQ:AMZN), and that’s not going to change any time soon. The key for retail companies is to face the threat and try to mount a defense, but that is not a strategy guaranteed to work.

We have seen numerous companies get walloped by the Amazon factor. Just mention or speculate that Amazon is looking into a certain area and there will be Armageddon.

Every area is vulnerable. For instance, the multi-billion-dollar U.S. pet pharmacy market is not currently on Amazon’s radar, but the fear is obvious.

Take the case of PetMed Express Inc (NASDAQ:PETS), an online licensed veterinary pharmacy selling prescription and non-prescription drugs and other products for cats and dogs.

After a terrific run-up from the $8.00 level in 2011 to $57.80 in January 2018, PETS stock has been in a severe tailspin, down 61% from its high.

Trading at around $22.50 at the time of this writing, PetMed stock looks oversold, with a contrarian look for aggressive traders seeking a good risk-to-reward situation.

Chart courtesy of StockCharts.com

Growing Revenue But Falling Earnings

While PETS stock is significantly down, the company has managed to increase its revenue in three straight fiscal years (ending March 30), and the growth is expected to continue.

Fiscal Year Revenue (Millions) Growth
2014 $233.4
2015 $229.4 -1.7%
2016 $234.7 2.3%
2017 $249.2 6.2%
2018 $273.8 9.9%

(Source: “PetMed Express Inc.,” MarketWatch, last accessed April 1, 2019.)

PetMed expects to grow its revenue by 5.2% to $287.9 million in fiscal 2019 and by 3.3% to $297.3 million in fiscal 2020. (Source: “PetMed Express, Inc. (PETS),” Yahoo! Finance, last accessed April 1, 2019.)

The company has been generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA), with growth in four straight fiscal years, including impressive growth of 39.7% in fiscal 2018.

Fiscal Year EBITDA (Millions) Growth
2014 $29.1
2015 $30.0 3.1%
2016 $33.2 10.6%
2017 $38.9 17.2%
2018 $54.3 39.7%

(Source: MarketWatch, op cit.)

PetMed is consistently profitable, with three straight fiscal years of growth in generally accepted accounting principles (GAAP)  diluted earnings per share (EPS).

Fiscal Year GAAP Diluted EPS Growth
2014 $0.90
2015 $0.87 -3.3%
2016 $1.02 17.2%
2017 $1.17 14.7%
2018 $1.82 55.6%

(Source: Ibid.)

But one concern is that the company’s forward earnings estimates have declined over the past 90 days, which is not what you want to see.

PetMed is estimated to earn $1.92–$2.05 per diluted share in fiscal 2019 and $1.87–$2.14 per diluted share in fiscal 2020. (Source: Yahoo! Finance, op cit.)

While the earnings risk is obvious, my view is that the decline in the PetMed stock price more than compensates for the lower earnings.

PetMed Express has also been producing positive free cash flow (FCF), with strong readings in fiscal 2017 and 2018.

Fiscal Year Free Cash Flow (Millions)
2014 $13.5
2015 $31.1
2016 $0.9
2017 $36.6
2018 $36.7

(Source: MarketWatch, op cit.)

Analyst Take

Despite the fact that PetMed stock (at the time of this writing) trades at a reasonable 10.4-times its high EPS estimate for fiscal 2020, the market is beefing against the company.

PetMed stock had a huge short position of  almost eight million shares as of March 14, representing a massive 53.2% of the float. (Source: Yahoo! Finance, op cit.)

If PetMed can deliver better financial results, we could see a short-covering pop in PETS stock.