I like a company that makes money, pays a dividend and has no debt, and that describes PetMed Express, Inc. (PETS). PetMed Express, which does business as 1-800-PetMeds, markets prescription and non-prescription pet medications and other health products for dogs and cats, and has served over 6 million consumers via its 800-number or its website. Pet care is a lucrative market, according to the American Pet Products Manufacturers Association; $50 billion a year is spent on pet care in the United States, and $3.5 billion of that is spent on pet medication. PetMed, which is a licensed pharmacy accredited by the National Association of Boards of Pharmacy, carries roughly 750 different products, with about 59% of its sales coming from non-prescription medicines and 40% from prescription medicines.
For years, veterinarians have had a virtual monopoly on pet medications and enjoyed considerable mark-ups, but in 1996, PetMed changed the industry by selling pet medications, along with flea and tick preventatives like Advantage and Frontline, for up to 25% less than veterinarians. The pet medication business then experienced a boom when large pharmaceutical companies entered the pet medication business; Eli Lilly (LLY), for example introduced a Prozac for dogs in 2007. Veterinarians still control roughly 75% of the market, and a number of pet pharmaceutical companies still will only sell their medicines to veterinarians.
The lack of pet pharmaceutical manufacturers willing to sell their meds to retailers has created a "gray market," where some veterinarians buy medication in bulk from the manufacturers, then resell them directly to retailers or to third-party distributors who sell to online retailers and others. However the trend may be changing. In 2010, Bayer Animal Health, a subsidiary of the German giant Bayer HealthCare, began selling its flea and tick products to both big box and online retailers. Other giant pharmacies may soon follow, as PetMed says it is working to establish direct purchasing arrangements with the major pet pharmaceutical manufacturers.
Sales of pet medication is projected to reach $9.3 billion by 2015, and that has brought some powerful competition from Wal-Mart (WMT), Target (TGT), and the online giant Amazon (AMZN), all of which have offered some of the same pet medications, some at a lower cost than PetMed. PetMed began to feel the heat as sales dropped. Add to that, smaller online companies, like Drs. Foster & Smith, are also competing with PetMed for a share of the online market. Due to stiff competition, even many vets have been forced to drop their prices to compete.
I wouldn't count PETS as down or out. In an effort to boost sales, PETS plans on expanding its product line, selling more higher-margin items, and advertise more heavily. PETS also has worked on cutting costs, which has shown as the company's EPS has improved 3% to $0.63 for the nine months that ended December 31, 2012. Net revenue for fiscal 2012 was $238.3 million, up 2.9% from $231.6 million in fiscal 2011. New order sales were $51.3 million, compared to $47.3 million for the previous year, an increase of 8.4%. The company enjoys strong repeat business, which has helped drive growth and profits, as reorder sales rose to $187.0 million, compared to $184.3 million for the prior fiscal year, an increase of 1.4%.
The company has a $257 million market capitalization, and 2012 net income was $20.9 million, or $0.92 per diluted share. Furthermore, PetMed is still one of the top drug stocks in regards to profit margins, which are at 7.12% over the past year. It has a P/E of 15.61 in an industry that has an average P/E of 21.81, and a dividend yield of 4.6 in an industry that averages 1.15. The company's quarterly dividend was increased from $0.10 per share to $0.125 per share paying approximately $10.7 million in quarterly dividends. At the same time, the company bought back approximately 791,000 shares of common stock for $12.2 million, and as of December 31st, the company was sitting on $30 million in cash.
encouraged by the company's efforts to revive the recent drop in new order and re-order sales.
I like PetMed. Not only is it the largest pet pharmacy in the US, but it has a solid balance sheet and $30 million in the bank, not including an additional $15 million in short term investments. The company has bounced back from a slowdown in fiscal 2011, and looks like it is on pace to continue to grow. I think PetMed has a bright future. I also like that 70% of its sales are generated from the Internet, and the company does not have the expenses that are associated with a retail brick and mortar store. I look for PetMed to continue to grow to be a leader in the pet medicine market. After what was a very good run up from $11.22 on January 2nd to a high of $14.51 on March 18th, the stock has pulled back dropping just over 10% in the last month of trading, closing on Friday April 12th at $12.86 per share. I believe this gives the investor a dip in price that now makes PetMed even more enticing of a buy.