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PetMed Express (NASDAQ:PETS), also known as 1-800-PetMeds, sells prescription and non-prescription drugs for dogs, cats, and horses via phone, fax, and its website. It is the largest mail-order retailer of pet meds and typically charges 10-15% less than its primary competition, local veterinarians.

PetMed Express has a rock solid balance sheet, with no debt and $40M of its $315M market cap in cash. Sales have risen consistently since the company went public, increasing from $10M in 2001 to $162M last year, an 18% jump from 2006. Profits have grown commensurately, increasing 20% last year to $0.60 per share.

Thus far, the company has benefited from the general migration of commerce to the internet. While this trend certainly isn’t going anywhere, I look for some other catalysts to keep growth at the company booming in the years ahead.

Today, pets are being thought of as more than just companions- they’re increasingly being regarded as actual members of the family. According to the American Animal Hospital Association’s 2004 Pet Owner Survey, 93 percent of owners would risk their life for their pet. Like any other family member, pet owners want Fluffy to get the best medical treatment money can buy.

From Technology Review: “I think the human-animal bond has changed in the last few years,” says Dawn Boothe, a veterinary internist and clinical pharmacologist at Auburn University in Auburn, AL. “People are starting to say, ‘My animal is a member of the family, and I am willing to pay the cost of drugs that were developed for humans.’ I think the pharmaceutical companies have picked up on that.”

It certainly appears they have - a flurry of new drugs from big pharma have been approved for pets in the first half of this year. In January, Pfizer won FDA approval for Slentrol, a weight-loss drug for dogs. The next month, Pfizer’s motion sickness drug for dogs, Cerenia, was given the OK. Merial (a joint venture between Merck and Sanofi-Aventis) and Boehringer recently began selling canine treatments for melanoma cancer and heart failure, respectively.

And in April, Eli Lilly’s newly formed pet division erased any doubts that doggy drugs are serious business - it received approval for Reconcile, a reformulation of Prozac.

If big pharma believes that the pet drug market is the place to be, I want to be right there with them. And I think that PetMed Express is the purest play on this trend. With only 30% of its sales currently coming from prescription drugs, the company stands to reap the benefits from the increased marketing and interest that accompany these new drugs. Its firm financial footing, strong brand name and future growth potential combined with a reasonable valuation (<22 PE and <2 P/S) make PetMed Express a long-term buy.

Disclosure: SmartGuyAB is long PETS

PETS 1-yr chart

PETS

Source: PetMed Express: An Investor's Best Friend