This Pet Pharmacy is for Value Investors

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Are you interested in a business that has been growing its top line and bottom line consistently for the last 10 years? In addition, this business has a quite conservative capital structure, with a lot of cash on hand and no leverage. At the time of writing, the business was trading at single digit EV multiple. It is PetMed Express (NASDAQ: PETS), a pet pharmacy small cap stock.

Business Snapshot

PetMed, established in 1996, is considered a leading nationwide pet pharmacy, offering a wide range of dogs and cats pharmacy products under several brands including Frontline Plus, Advantage II, Sentinel and Interceptor. The business is divided into two main segments: Non-prescription medications and Prescription medications. The majority of its revenue, 59%, was generated from the non-prescription mediations segment, while around 40% of the total revenue was generated from the prescription medications. In the past two years, there have been around 2.7 million customers who have purchased from PetMed. The company reported that it mainly focused on retail customers, with additional 645,000 and 722,000 new customers in the fiscal year 2011 and 2012, respectively. 

Fast Growing but No Leverage

Investors might be attracted to the company due to its spectacular growth in its top line, bottom line and cash flow over the past 10 years. The revenue increased from $55 million in 2003 to $238 million in 2012 while the net income grew from $3 million to $17 million in the same period. PetMed hadn’t generated any free cash flow until 2005. Since then, its free cash flow has also on the rising trend, from $8 million in 2005 to $20 million in 2012. Interestingly, since 2003, the company has delivered significant high returns on invested capital that has been fluctuating in the range of 18.7% - 84.5%. Over the past 12 months, the return on invested capital was 23.34%. In order to grow fast and deliver a high return on invested capital, does PetMed utilize a lot of leverage in its operation? The answer was No. The company had a quite conservative capital structure. As of December 2012, it had $62 million in total stockholders’ equity, $30 million in cash, $15.5 million in short term investments and no debt. The short-term investments were mainly in the form of bond mutual funds.

Cheapest Valuation and Highest Dividend Yield

PetMed is trading at $13.30 per share, with the total market cap of $256.4 million. The enterprise value stays at nearly $205 million. At the current market price, PetMed is valued at only 7.5x EV/EBITDA. PetMed is the smallest company compared to its two peers including Zoetis (NYSE: ZTS) and PetSmart (NASDAQ: PETM). At the current trading price of $63.45 per share, PetSmart is worth around $6.82 billion on the market. PetSmart is valued a bit more expensive at 8.56x EV/EBITDA. Zoetis, the spinoff from Pfizer, is considered the biggest company with $16.36 billion in total market cap. It is also the most expensive, with 16.3x EV/EBITDA. Indeed, Zoetis is the global leader in medicines and vaccines for animals, with more than 300 products in 120 countries. Among the three, Zoetis generated the highest operating margin of 20%, while the operating margins of PetMed and PetSmart were only 11.2% and 9.2%, respectively. What I personally like about PetMed is its high dividend yield at 4.5%. Zoetis is not paying investors any dividend at the moment, whereas the dividend yield of PetSmart is quite low, at 1%.

Foolish Bottom Line

With a decent operating margin, a conservative capital structure, a high dividend yield and a cheap valuation, PetMed fit well in the long-term portfolios of patient investors.


hoangquocanh has a position in PetMed. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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