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Risk-Reward With PetMed Express

- By Jonathan Poland

PetMed Express (PETS) is an online pet retailer headquartered in South Florida. The company has a consistent history of growth and dividend payments, and after trading north of $60 a share, its stock is back to trading at levels last seen in early 2017. Last week, PetMed Express (doing business as 1-800-PetMeds) posted second-quarter results with revenue up 7% to $71.4 million, and net income up 22.7% to $10.8 million, or 52 cents per share.


Re-order sales rose 11% during the quarter, suggesting that customers are finding good value with the company's everyday offerings versus competitors. Most importantly, the average order value increased from $85 to $87 year-over-year. People love their pets.

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In fact, Grand View Research predicts the size of the pet care market to be worth over $200 billion by 2025 with over-the-counter supplies being a large part of that value. In Washington, D.C., people are buying homes just so their dogs can have a yard. The outpouring of pet love is not slowing down.

PetMeds is a brand-name, low-cost leader in a highly fragmented market. This is a slow and steady growth story with the company's top line up to $282 million in the last 12 months from $219 million in 2009. Capital spending comes in at just a fraction of the company's net income, and thanks to share buybacks, the earnings per share have rocketed up more than 100% in the last decade, paving the way for a 200% increase in dividends. Over the next four quarters, PetMeds is looking to pay out $1.08, above 4%

The shares had been drifting lower due to investor concerns about improved competition from both internet retailers (like Chewy.com) and traditional brick-and-mortar stores. But this is more the result of the overall pie getting larger versus encroachment on its brand value. These concerns have manifested in many short-sellers. Currently, 38% of PetMeds shares are sold short, which could continue to put pressure on the stock in the near future.

Long term, PetMeds remains a low-cost source for pet supplies and pharmaceuticals, namely the monthly flea and tick meds that all responsible pet owners use to protect their furry loved ones. As long as PetMeds continues to increase average order size along with its customer base, the sales, profit and dividend payouts will continue to increase. The truth is that the company's stock is fairly valued right now and still offers excellent potential for patient investors.

Let's say all PetMeds does is mirror the success it had over the last decade, namely 28% growth on the top line coupled with a 13% share buyback, and can keep the current 19% operating margin. By 2028, it would be earning over $3.00 and paying out $1.50 or more. This would put the stock in the $60 range, good for a 120% gain before dividends, with the dividend payment on today's share price above 5% annually. For investors looking for consistent growth and income, PetMeds is definitely a stock to consider.

Disclosure: I am not long/short PetMeds .

This article first appeared on GuruFocus.