Trupanion, Inc. TRUP is riding on the trend of humanization or personification of pets. The stock is a pure play provider of insurance for cats and dogs and is set to gain from the burgeoning and underpenetrated pet insurance industry.
There is a noticeable change in the attitude of pet owners who earlier looked at dogs as guards and cats as mice eaters only. Now they consider pets mini-babies in their families. This shift in perspective also made pet owners more focused and vigilant about the health of their pets and is the main driving force behind the surge in pet insurance sales in recent years.
Strong Growth in Key Metrics
Trupanion’s key metrics are its revenues, retention level, pet enrollment and average revenue per pet. In the latest reported quarter, revenues grew 43% to $168 million, marking the metric’s 46th consecutive growth. Its pet enrollment surged 279499 in the first six months of this year, crossing above the 1-million mark. Its average revenue per pet also increased, reflecting customers’ stickiness for its products and services.
Per management, the company’s average monthly retention is 98.72% compared with 98.66% reported in the prior-year period, mirroring only less than 2% of customer migration, which rather underlines the effectiveness of the company’s products.
The average pet now stays with Trupanion for 78 months, which is up from 70 months registered a few years ago. This means that customers stays for a longer periods, creating a very dependable and consistent source of revenues. Higher retention rates also signal the customers’ preference for the company’s products and are indicative of attracting new customers successfully.
Investments on Track to Meet Goals
In the reported quarter, adjusted operating income grew 32% to $18.5 million. Of the same, funds worth $17 million were deployed to the company’s subscription business to acquire nearly 56,000 pets at an estimated internal rate of return of 34%. Per the company, growing its adjusted operating income and deploying as much of this as possible at attractive internal rates of returns are the fundamentals of its business model. We believe, the company is on the right track for growth.
Apart from the $17-million capex on pet acquisition, the company invested an additional $1 million roughly compared with the prior-year level. This spend primarily catered to its next-generation product administration platform, which will be launched in the next 12 months. The company expects the same to support its new product initiatives, improve member experience and build upon its position as a global low-cost provider in the industry. These investments are part of the company’s 60-month strategic plan to become a multifaceted entity with a turnover of $1.5 billion by 2025 a year.
This will also help the company capture a decent market share in the industry, which is witnessing stiffening competition as MetLife, Inc. MET entered the space via the acquisition of PetFirst Healthcare, and also expanded its pet insurance offerings recently. Another insurer Lemonade, Inc. LMND launched pet insurance last year. Synchrony Financial SYF bought Pets Best, a pet health insurance company in 2019.
Solid Balance Sheet
The company’s solid balance sheet marked with cash and investments of more than $219 million and no debt supports investment in new product development and international expansion. Though its operating cash flow was negative in the quarter under review, it must not be of much concern as is typical of a company in its growth phase. Its development initiatives will pay off going forward.
Upped Guidance Instills Investors’ Confidence
Following a better-than-expected performance in the first half of this year, the company lifted its 2021 guidance. It now expects subscription revenues in the range of $495-$498 million, indicating 28% growth from the year-ago reported figure at the midpoint. Adjusted operating income is estimated at around $76 million, implying 34% growth from the prior-year reported number with above 90% of it being generated from the subscription business. Of the $76 million of adjusted operating income, approximately $69 million will be invested in acquiring pets within the subscription business while an amount in the $3-$5 million band will be spent on development initiatives.
Against the backdrop of the company’s long-term growth strategies and its niche presence in the pet insurance and a total addressable market of $33.7 billion, it has enough room for growth. The stock should thus be retained for long in the investment portfolio to reap solid returns. In the past year the stock has gained 40.7% compared with its industry's growth of 47.5%.
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Trupanion currently carries a Zacks Rank #3 (Hold). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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