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Sunday, October 18, 2009

Watching PetMed Express Tomorrow - Some Pressure, But Different than 2006

PetMed Express (PETS, $19.66) reports F2Q10 (September) results Monday morning before market open. We suspect the results will be just fine and the company has a history of beating Wall Street expectations (which is perilous in event of a disappointment):

However, we know some are questioning further, near-term upside following the recent run (including push through $20 on Friday): insiders (94 thousand shares sold in past six months, see link), short sellers (down from earlier this year, but still 5.0 million shares or 22% of float, see link), and Jon 'DRJ' Najarian's optionMonster.com ("Options Turn Bearish on PetMed Express", see link).

OptionMonster notes that "The $20 mark served as resistance for PetMed Express in [March] 2006, and at least one trader expects that level to keep the stock in check again now." We can't help but submit that PetMed Express is in a different place than in early 2006: the company will earn more than one dollar (consensus F10E = $1.14) this year versus only $0.50 in F06 (end March). We include a five year stock chart below:

Indeed, based on our model, PetMed Express is no longer a bargain. Aside from discounted cash flow (DCF) analysis, the company generally appears fairly valued depending upon approach:
  • DCF assuming 10% cost of capital and 2% terminal growth = $29 fair value
  • FCF multiple of 20x F2011E FCF (discounted 1.5 years to 9/30/09) = $20 (18x = $18)
  • Private Market Value (PMV) with capitalization rate of 10% applied to F2011E EBITDA = $25 ($21 discounted to 9/30/09)
  • Earnings Power Value (EPV) with capitalization rate of 10% applied to F2011E adjusted EBIT = $17 ($15 discounted back)
That said, the company's established niche market position and financial performance in the face of a "couple dozen online competitors" (per management - see this presentation, slide 11) should enable sustainable forward growth and significant excess cash generation, thereby lending support to the DCF valuation.

Our model shows net cash/investments per share increasing to $5.50 per share in F2013 (3.5 years) from $1.90 at year-end F2009 (March) assuming the current dividend of $0.40 growing 10% per year but no incremental share repurchases (*unlikely, but we're allowing cash to simply build on balance sheet). These are the types of businesses we like to own.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long PETS.

© 2009 Jeffrey Walkenhorst
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