PetMed Goes To The Dogs (PETS)

It's hard to find the investment appeal of PetMed Express (Nasdaq: PETS). Through the internet and 800 numbers, the company delivers animal medicines for cat, dogs, horses and the such.

Giving the company its due, the revenue growth recently has been good. The revenue for Q4 05 rose to $25.9 million from $20.8 million a year before. Income from operations was $3.9 million

A recent report from Avondale Partners expressed some concern that veterinarians were starting to compete with PetMed by offering medicines at comparable prices. The stock pulled back three or four dollars from its 52-week high of $20.20, but the price has still run up from $6.44 last spring. So, for investors who got in then, it is a solid triple.

When a company has a price run like this, it is harder and harder to keep it up. The temptation to take profits becomes greater, especially when pieces of bad news emerge.

The "Risks" section of 10-K's do not get enough attention from investors. PetMed makes a fairly good case here for being a victim of its own success. "Since we began our operations some veterinarians have resisted providing our customers with a copy of pet prescriptions or authorizing the prescriptions to our pharmacy staff..." Surprise, surprise. The vet does not want to see some of his income going to an online provider. So, the doctor's office withholds the paperwork, and now, according to Avondale, the vet is dropping his prices as well.

At a $400 million market cap and a 35 PE, PetMed could still fall a ways back toward $10. One little miss and investors who got in low may be tempted to take the gain.