This Old Dog Still has a Few Tricks Left
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You know that feeling you get after buying a stock that you spent days and weeks researching? It’s that one part exhilaration and two parts trepidation as you think you’ve found this hidden gem overlooked by the market while at the same time wondering if it was missed for a reason. What often happens is that maybe a day or week after buying, the stock drops by double digits and you feel like just dumping all your money into an index fund.
I’ve lost count on how many times that’s happened to me. What I haven’t lost is my ability to persevere past the paper losses. That’s why I didn't panic when my recommendation of PetMed Express (NASDAQ: PETS) quickly went south.
Originally, I wrote puts on the company to add its healthy dividend to my “No Drip, No Mess” portfolio. I wanted to generate both option and dividend income to reinvest elsewhere and thought PetMed would be a good income generator. I was hoping to get a few rounds of writing puts in before taking shares, but their first quarter earnings miss sent shares well below my strike price and into my portfolio.
Stating the obvious but you can bet I was going to be watching their second quarter earnings and hoping they didn’t blow it again. Coming into the report analysts were expecting just 17 cents a share on the bottom line which was down from the 20 cents they earned the previous quarter and down more than 10% from what they earned a year ago. The company is being pressured by both online and brick-and-mortar peers which is stagnating revenue and compressing margins.
When the company reported 2nd quarter earnings earlier this week you can imagine the surprise when they beat estimates handedly by earning 20 cents a share. While it was still not a great report as revenue continues to stagnate and let’s face it earnings aren’t exactly growing either, it’s less bad than the market was expecting. That relief sent shares leaping higher. Although some of that initial enthusiasm (or more likely short covering) has worn off, it’s a step in the right direction.
Having recently become a pet owner I want to invest in a company to cash in on the money Americans are spending on their pets. As I've started to follow the company closer my concern is growing that PetMed Express isn’t the one cashing in, nor do they have a clear path to growth. Dominating their niche would have been fine, but they’re not doing that either.
I had said in my earnings preview that “I’ve yet to find a reason to buy anything from PetMed Express. They either don’t have the product I need or I can buy it much cheaper on Amazon (NASDAQ: AMZN). Most times though I’ll go to PetSmart (NASDAQ: PETM).” Now, I have a very healthy little kitten so that’s part of the reason I don’t have a reason to order much of anything from PetMed. It still is concerning that when I do need a product that I can find it cheaper elsewhere. That's not a trend I want to keep seeing.
So where does that leave investors? If they’re like me, they're still skeptical of PetMed's ability to actually grow sales and earnings. The competition is just beginning to heat up with Amazon, not just on their core site but on their wag.com site as well. They offer a dizzying array of products for pet owners and are beginning their expansion into PetMed’s bread and butter flea and tick business. Fool Blogger Brian Shaw does a great job outlining how Amazon is taking over the world of pet supplies. This threat, combined with that of PetSmart’s stores makes it a tough road ahead for PetMeds.
When I decided to invest in PetMed Express the thesis was that it would be an income position and that income via the dividend is certainly safe for the foreseeable future. They have $62 million worth of cash and short term investments against a $3 million dollar quarterly dividend and which is fully funded by their $4 million in quarterly earnings.
That feeling of exhilaration is long gone, but at least the feeling of trepidation isn't as strong as it was after their last earnings report. The jury is still out on whether or not their focus on marketing will begin to drive revenue higher. What's been a dog of an investment so far still has a few tricks left, until the next one the dividend will have to do.
latimerburned has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com 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.