Fewer Pet Meds for Now, But Maybe Many More Soon
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's too early for the public to invest in the companies at the 2012 Animal Health Investment Forum, but investors could get a look at some products that pet stores might sell a few years from now. Timothy Hay, at the Wall Street Journal, reports that startups plan to pitch dog dental care products, animal pregnancy tests, and other inventions to a group of investors in Kansas City in late August. These animal care products could show up online at PetMed Express (NASDAQ: PETS) or at a nearby PetSmart (NASDAQ: PETM) retail store.
PetMed Express offers a sizable dividend yield right now, as Yahoo! Finance lists its forward dividend yield as 6.2 percent. Although PetMed Express' 71 percent payout ratio is high, PetMed Express currently has $68 million in cash and zero debt, and it's an internet retailer so it doesn't have to pay some of the overhead costs that PetSmart incurs. PetSmart has a 1 percent forward dividend yield itself, with a 20 percent payout ratio that should be much easier to maintain.
Part of the reason for PetMed Express' high yield right now is that it's coming off a weak quarter. PetMed Express' 1Q 2012 earnings release explained that more pet owners shopped at PetMed's website, but these visitors didn't spend as much money because supplier Novartis (NYSE: NVS) stopped producing several medicines that were very lucrative for PetMed Express when it shut down one of its factories. PetSmart has many pet products to sell besides medicine, and its last quarter was very strong even with some drugs in short supply.
Novartis shut down the factory in December 2011, which caused shortages of several pet medications throughout much of 2012. JoAnna Lou, at The Bark, reported that Novartis medicines Interceptor and Sentinel were still difficult to find in June. Since vets, pet stores, and general retailers were all struggling to find these medications, it's unlikely that any individual retailer had a chance to get new customers here, but the shutdown could be a hit to Novartis' reputation. PetMed Express doesn't seem like it's in Walgreen's position, where Walgreen couldn't fill Express Scripts prescriptions but other retailers could.
Novartis explains the shutdown at its own Animal Health website, stating that it's now making Clomicalm again and it's currently determining whether it's ready to make Sentinel again. The shutdown affected several other products as well, including Program, Deramaxx, and Milbemite. This shortage seems like it could still affect PetMed Express' results in 2Q 2012 as well, which could mean another weak quarter, but this still seems like a temporary concern.
A Veterinary Practice News article lists the 2010 forum participants, and Pet Care Specialists, LLC caught my attention. Pet Care Specialists was seeking $15 million, more than most of the startups, and it mentioned both Internet sales and a deal with Wal-Mart (NYSE: WMT). PetSmart and PetMed's niche focus should help these companies compete with Wal-Mart's lower prices, but the Pet Care Specialists deal could help Wal-Mart compete with PetSmart in the pet services market, which is one of PetSmart's main competitive strengths. Pet Care Specialists' website only lists four salons inside Illinois and Tennessee Wal-Marts, so this startup will have to grow a lot bigger to pose a real competitive threat to PetSmart. Although Pet Care Specialists is still an LLC for now, it does offer franchises and seems like it plans to grow rapidly, so Pet Care Specialists could become an interesting IPO in a few years.
The interest in the Animal Health Investment Forum suggests that PetMed Express could have a wider product lineup in a few years. Investors seem like they're still very interested in pet health, and PetMed Express, PetSmart, Novartis, Wal-Mart, and Pet Care Specialists all realize the potential of the sector. Although PetMed Express may struggle in the short term, it still seems like it could be a good long term pick once Novartis gets its factory back to full production.
Eric Novinson owns shares of PetSmart. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Novartis and PetSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
