Pet owners continue to increase spending on their furry companions at a back-breaking pace. According to Grand View Research, the U.S. pet care market is estimated to be worth over $200 billion by 2025. In 2015, the U.S. pet care market was worth $60.22 billion. The growth potential is astronomical, as the love for our dogs, cats, and other animals only continue to grow.
A key driver of the overall market size is estimated to come from over-the-counter supplies. Part of the reasoning behind increase in spending is the pet care industry’s strong shift to healthy, more natural foods and supplies for dogs, cats, etc. Of course, the healthier options do not come without their notable hike in pricing. The massive growth in the sheer amount of options and different types of natural food, supplies is a clear indication that pet owners also want options.
Healthcare and veterinary costs are also another area of growth, which is not to be unexpected. Cost of care and medication is set to continue increasing for everyone, which is partially due to new technologies and innovations.
As the U.S. pet care market looks to continue its impressive growth, one high-risk, high-reward stock to watch is PetMed Express, Inc. (NASDAQ: PETS).
Overview: PetMed Express
PetMed Express operates as an online pet retailer, which primarily does business as 1-800-PetMeds. The platform is an online pet pharmacy and non-prescription medication provider for dogs and cats, which has earned the platform to be called “America’s Largest Pet Pharmacy.” The company also sells other pet items, such as beds, crates, food, stairs, and other items.
Founded in 1996, PetMed Express has long benefitted from overall growth and consumer preference of online shopping. The internet-based operations allow costs to be easier controlled than brick-and-mortar competitors that have to pay rent, staff workers, Point-of-Sale technology, security, etc.
However, PetMed Express is continuing to face growing competition from other online pet retailers. Two of the most notable online competitors are Chewy.com and Amazon.com, Inc. (NASDAQ: AMZN). PetMed Express takes a more medical supplies approach, compared to Chewy’s food and accessories approach. However, Chewy is increasingly focusing on its pet pharmacy offering, which has grown over the past few years.
PetMed Express investors have been extremely concerned about losing market share of the online pet pharmacy industry to Chewy, Amazon, etc. The concern has caused the company’s stock price to be cut 50.80% over the past year.
Financial Strength and Undervalued Compared to Overall Industry
As of January 2019, PetMed Express has a market cap of $488.11 million, price-to-earnings (P/E) ratio of 12 and a forward P/E ratio of 10.11. Furthermore, the online pet pharmacy holds cash per share of $4.21, zero debt on its balance sheet, and pays a 4.58% dividend. This gives the company a very strong current ratio of 7, which means PetMed Express will most likely have no problem paying its bills or dividend.
PetMed Express also has fantastic efficiency ratios and margins:
- Return on assets (ROA) of 29.80%
- Return on equity (ROE) of 35.50%
- Return on investment (ROI) of 28.70%
- Gross margins of 35.70%
- Operating margins of 19%
- Profit margins of 14.90%
According to Reuters, the U.S. pet care industry average for P/E ratio comes in at a lofty 21.34. Furthermore, the average industry financial strength shows anything but strength: current ratio of 1.33, total debt to equity of 21.57.
Pet care industry average efficiency ratios and margins:
- ROA of 5.66%
- ROE of 11.89%
- ROI of 10.60%
- Gross margins of 18.54%
- Operating margins of 3.35%
- Profit margins of 2.33%
Overall, PetMed Express has some strong attributes that cannot be overlooked: extremely strong financial stance and a valuable brand with strong history. However, competition is going to continue and it is likely that market share could be squeezed if management cannot find a way to solve differentiation. The stock has been in a downtrend since July and has a short float of 35.89%, which does make PetMed Express a potential short squeeze candidate.
Chewy seems to have captivated attention very quickly through its heavy use of social media and key marketing strategies. It may be time for PetMed Express to increase its online presence in a similar method as Chewy.com, in order to catch eye of new and younger pet owner consumers.
Disclaimer: The author and Spotlight Growth has no positions in any of the stocks mentioned in this article. Nor does either party currently have any relationship, or any other conflicts of interest, with any of the companies mentioned in this article. This content is meant for informational and entertainment purposes only and should not be meant as a recommendation to buy or sell any securities. Please visit a licensed financial representative to determine what investments are right for you.