Trupanion: Industry M&A Comp Puts $9 Price Target On The Stock

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About: Trupanion, Inc. (TRUP), Includes: SYF
by: The Capitolist
Summary

Synchrony (SYF), a consumer financial services company, purchased a pet insurance company named "Pets Best" last week for an undisclosed sum.

I believe that we can triangulate an "upper bound" of $90m for the purchase price of "Pets Best" that gives a relatively good comp for TRUP shares.

Pets Best has 125,000 pets under management (policy holders) which makes it roughly 25% the size of TRUP.

If HSR is not triggered it suggests that the transaction is lower than $90m.

Trupanion (TRUP) is a pet insurance company that wall street wants to be a SAAS company. According to the latest 10k TRUP has 430,770 covered lives in its subscription business and is currently struggling to maintain its statutory capital ratios (as prescribed by the National Association of Insurance Commissioners).

Source: TRUP 10k, EDGAR

More concerning is the inflated share price in the wake of a devastating comp provided by the acquisition of "Pets Best" by Synchony Financial (SYF). Below I will detail how I triangulate a likely upper bound to the purchase price, and thus the likely maximum value of the TRUP subscription business as it sits today. My current estimate for the purchase price of "Pets Best" is under $90m, which suggests that the TRUP subscription business is worth $9.03/share.

Source: EDGAR SEC Filings, Bloomberg

There are three main points to discuss here:

  1. The comp calculation shows that today, the purchaser of TRUP shares is paying for the full value of the company AFTER it grows an additional 230%, and that fair market value is ~69% below the closing price on Monday 3/11.
  2. It also highlights that potential acquirers have the option of buying smaller companies for MUCH lower valuations without giving up too much in terms of scale.
  3. The SYF transaction permanently damages any moat around the TRUP sales channel (which I have voiced opinions against from a regulatory standpoint), whether I'm right or wrong about the legality of the sales tactics is now irreverent as SYF is far more penetrated into the sales channel then TRUP is.

What Happened?

Last week Synchrony Financial (SYF) bought Pets Best insurance for an undisclosed sum. According to Veterinary News the acquisition will create a competitive advantage for SYF by pairing the insurance arm with the Credit arm of SYF. For its part "Pets Best" looks like a worthy competitor to TRUP and thus a reasonable comp as well.

Source: Pets Best Website

The Comp is Really Bad

Although the price of the acquisition of "Pets Best" is not disclosed SYF did disclose that they have 125,000 covered lives under management. and according to Heart-Scott-Rodino ("HSR") thresholds SYF would have forced to file for approval if the transaction was at or over $90m.

Source: New HSR Filing Thresholds for 2019 | Publications | Morrison Foerster

The FTC offers a Docket of all companies that have applied for and received clearance for their transaction under an early termination notice (LINK HERE). The early termination program exists to help speed up the review process for transactions that meet the threshold in dollar terms but are not likely to fail the various other tests that would hold up a transaction (more info HERE).

Importantly there is no approval for the SYF /"Pets Best" transaction, which suggests to me that there is a great likelihood that the transaction itself was priced under the threshold. If so we can conclude that $90m is the maximum that SYF paid for 125,000 covered lives AND the "Pets Best" brand.

The comp analysis:

Source: EDGAR filings, Bloomberg

Re-posted from above we can see that the $90m maximum buy out price yields a value of $720/pet. This implies that TRUP's subscription business is worth roughly $9.03/share or a 69% discount to its current stock price.

Even TRUP thinks the pets are only worth about $720/pet... according to the latest press release the company itself values the LTV of their pets at $710/pet (below). The conclusion here is something that insurance investors have known all along, you are worth your assets and in this case that's ~$9/share.

Source: Earnings Release

Although it is possible that SYF did not use the early termination program to close this transaction I can't think of a good reason not to. I think the bulls are going to need to prove that the transaction was anywhere near the ~$300m it would need to be to justify the current TRUP stock price. Personally, I stand by the assertion that $9.03/share is the maximum value of the subscription business today based off of the "Pets Best" comp and the 3x book value I have subscribed to for months.

The Moat Is GONE

At the Bank of America conference a few weeks ago TRUP's comments about the importance of their "Moat" in the veterinarian channel were unequivocal:

"Today, we have about 105 Territory Partners visiting about 21,000 clinics. It has taken me 18 years to build out that sales force who now have made over 1 million face-to-face visits with veterinarians, on average about 80,000 to 90,000 visits per year. The relationships with the veterinarians is the most difficult, hardest thing to copy." - Darryl Rawlings 2/25/19

This is not good... SYF is far more penetrated in the Vet Channel

To help understand how badly this "Moat" argument has been eroded we only need to look at TRUP's claim in the Q3 earnings call:

Conclusion

The comp speaks for itself at ~$9/share in underlying value, however the competitive aspect of this transaction is drastically under appreciated by the sell side. Two quotes form the SYF press release stand out:

  1. "In a move that brings together loan capabilities with long-term pet health insurance coverage in one company, consumer financial services company Synchrony—owner of CareCredit—has acquired the pet health insurance company Pets Best."
  2. CareCredit’s reach in veterinary practices is a perfect opportunity, says CareCredit EVP and CEO Beto Casellas. “Forty percent of our CareCredit customer base has had a transaction at a veterinary office,” says Casellas

My translation is simple: everything TRUP says it does we do better with far more penetration into the sales channel, we also offer integrated credit cards for ease of payment to the veterinarian (without cumbersome software like trupanion express) and ease of claims processing for the plan holder. Just look at how integrated the Care Credit franchise is for the consumer:

I don't see how this transaction can mean anything BUT risk for TRUP, not only does it establish how overvalued the company is but it also deflates the entire "economic moat" thesis.

Disclosure: I am/we are short TRUP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am/we are short TRUP. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. Additional disclosure: This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.