Pat McKeough recently responded to a Member of his Inner Circle who wanted his opinion on an online pet-care pharmacy operating in the U.S.
PetMed Express sells prescription and non-prescription medications for pets through the Internet, telephone and direct mail. Despite steadily rising sales and strong results in the last quarter, its shares fell sharply. That points to several challenges for the company, says Pat, including questions about opioid sales and mounting online competition from PetSmart.
Q: Hello, Patrick. Do you have any information about a drug company called PetMed Express (PETS on Nasdaq)? Best wishes and thanks.
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A: PETMED EXPRESS (symbol PETS on Nasdaq; www.1800petmeds.com) is a leading online U.S.-wide pet pharmacy. The company does business as 1-800-PetMeds. It sells prescription and non-prescription medications, and other health-related products, through three main channels: the Internet, telephone contact centers, and direct mail.
PetMed’s sales have risen steadily over the last five years. On the other hand, profits have moved up much more strongly. That’s because the company in increasingly selling higher-profit margin pet medications.
In fiscal 2013 (years end March 31) the company reported of sales of $227.8 million. In 2018, sales were 20.2% higher, at $273.8 million. PetMed made $17.2 million or $0.86 a share in 2013. By 2018, earnings had moved up 116.9%, to $37.3 million, or $1.83 a share.
For the most recent quarter, ended March 31, 2018, PetMed’s revenue rose 6.8%, to $67.3 million from $63.0 million a year earlier. Earnings jumped 35.7%, to $10.2 million, or $0.50 a share, from $7.5 million, or $0.37, a year earlier.
The stronger results come from improved sales for new-generation medications, which offer higher profit margins. That allowed the company to spend more on advertising to acquire new customers. The value of the average customer order has risen 3.5%, to $89 from $86, mainly because of that increased ad spending. The company also raised its quarterly dividend 25% with the February 2018 payment, to $0.25 a share from $0.20. But despite the good news, the stock fell sharply from $53.24 in mid-January 2018 to just over $33 in early May. It has recovered some of those losses in the past month.
Growth stocks: Company attributes higher sales to “next-generation” flea and tick medication
There are a number of reasons for the drop:
Prior to the drop, the shares had more than doubled in under a year.
With PetSmart’s move to sell medications online (starting October 2017), PetMed may not have the pricing advantage it once had.
The company has also been under media scrutiny since the summer 2017 when anonymous short-sellers, calling themselves Aurelius Value, accused PetMed of using its 1800PETMEDS.com to sell pet opioid drugs to human users. That medication includes Tramadol, a painkiller that is also prescribed to human patients. Although the formulations are similar, the pet version of the drug is relatively inexpensive compared to the one prescribed to people.
However, PetMed says that sales of Tramadol and gabapentin (a nerve-pain drug also sought by some addicts) made up just 0.4% of total sales over the six months ended June 2017. Those sales have also declined over the past five years. In addition, the company says its pharmacy staffers only dispense a prescription if they have a veterinarian’s written or verbal prescription or the vet’s letter of authorization.
PetMed attributes its higher sales and profits to new “next-generation” flea and tick medication such as NexGard, Trifexis and Bravecto. These can be fed to pets as chewable tablets and replace older treatments, which need to be applied to the skin.
Meanwhile, the company has removed its ads for Tramadol from Google searches. That’s because people searching for “opioids,” “opiate withdrawal” and related keywords were seeing its ads. That marketing material had also come up in search results for drug-abuse related keywords and phrases.
As at December 31, 2017, PetMed held cash of $77.9 million, or $3.78 per share. It has no debt.
The company’s shares trade at 19.3 times this year’s forecast earnings of $2.21 a share. With its latest dividend increase, the stock now yields 2.3%.
Inner Circle recommendation: PetMed Express is okay to hold, but only for aggressive investors.
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