PetMed Express: A High-Yield Small Cap Cashing In On A Booming Industry

Aug.15.14 | About: PetMed Express, (PETS)


PetMed capitalizes on the nearly recession-proof pet care industry.

PetMed is a cheap stock with a high dividend yield.

The company is in great financial shape, with lots of cash and almost no debt.

The pet health care industry in the United States is booming, and proved to be nearly-recession proof even during the darkest days of the financial crisis five years ago. Americans have proven an amazing willingness to spend enough to make sure their furry friends are happy and healthy.

Recent data from the government backs this up. The Bureau of Labor Statistics reported last year that approximately three-quarters of U.S. households own pets. In all, there are about 218 million pets in the United States, and as is the case with every living thing, health care is a basic need for them. On average, every U.S. household spends around $500 each year to care for their pets. Pet care is a $61 billion industry by annual sales.

There are many ways to play this attractive trend. One is through the well-known retailer PetSmart (NASDAQ:PETM). While PetSmart is a solid, growing company, a better bet would be pet pharmacy operator PetMed Express (NASDAQ:PETS).

PetMed Express is a small cap, with only a $280 million market capitalization. It's got a lot of room for growth, and it offers an attractive valuation and a high dividend yield as icing on the cake.

Cheap stock, compelling dividend

PetMed Express recently released first-quarter earnings, which showed revenue declined 2% and earnings per share rose 4%. The company was able to produce earnings growth despite falling sales because of expanding margins. PetMed spent less last quarter in advertising, which helped boost expenses, but likely came at a cost to sales growth. Going forward, management will focus on advertising more, in an effort to re-energize sales growth.

Looking further back, the financial results are more encouraging. In fiscal 2014, revenue and earnings per share grew 2% and 4%, respectively.

Here's how PetMed stacks up against PetSmart.

Trailing P/E Multiple

Dividend Yield

Total Debt to Equity Ratio

PetMed Express








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PetMed Express is fairly cheap. The stock trades for 15 times earnings, which is a significant discount to the broader market. And, it offers a nice 4.8% dividend, which is well supported by underlying profits. By comparison, PetSmart is a more expensive stock that offers only a 1.1% payout.

Despite its already-high yield, PetMed still grows its dividend steadily. It doesn't offer dividend increases every 12 months like other dividend stocks typically do, instead upping its payout every six quarters or so. It makes up for this with solid dividend increases. For instance, over the past five years, PetMed has increased its quarterly dividend from $0.10 per share to $0.17 per share, representing 11% compound annual growth rate.

In addition, PetMed Express has a very strong balance sheet. The company has very little debt on the books. Moreover, PetMed has $44.7 million in cash and short-term investments on the books. This equates to about 16% of the company's market capitalization. Also, PetMed has no long-term debt.

Several tailwinds for investors

PetMed Express might be a stock that flies under your radar, due to its small size. That would be a mistake, because it has a lot working in its favor. The company is growing and is a cheap stock, operates in a huge and nearly recession-proof industry, and offers a high dividend payout. In addition, PetMed is in great financial position, with a lot of cash on the books and almost no debt to worry about.

Because of all this, PetMed could be a great pick for value investors, small-cap investors, dividend investors, or all three groups.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.