average implied price of $19Fiscal 2008 ending March should represent the firm's sixth consecutive year of at least 20% per-share profit growth. While earnings growth is expected to slow to about 10% in fiscal 2009, recent operating results suggest PetMed is capable of exceeding consensus expectations.
"PetMed is benefiting from strong market fundamentals and constructive trends. An estimated 63% of U.S. households own a pet, up from 56% in 1988. The U.S. dog and cat population is estimated at a staggering 163 million.
"Increased pampering of pets and the growth of pet health insurance has fueled spending that shows little sign of letting up. Over the past five years, overall U.S. pet expenditures increased at a 7% annual rate. Spending rose 7% to $41 billion in 2007 and is projected to top $43 billion in 2008.
"Consensus estimates project Pet-Med will earn $0.18 per share in the March quarter, up from $0.15 in the year-earlier period. For fiscal 2008 ending March, consensus estimates project per-share profits will be up 32% to $0.79, with revenue increasing 17% to $190 million.
"For fiscal 2009, per-share profit estimates range from $0.82 to $0.91, with an average of $0.87. PetMed has exceeded consensus profit estimates in seven of the last eight quarters, and near-term expectations appear conservative. Over the next five years, per-share profits are expected to grow 16% annually.
"PetMed advertises aggressively on television, online, and via direct mail. Leading up to the 2004 presidential election, PetMed faced higher advertising costs for acquiring new customers and a decrease in new customer sales, partly attributed to a shortage of television advertising inventory.
"With the 2008 election looming, PetMed has done a good job holding advertising expenses in check. In the
December quarter, the advertising cost of acquiring a new customer was $33, down 11% from a year earlier.
"The potential for increased competition, coupled with an unfavorable advertising environment, has some investors worried. But the stock price discounts those concerns. PetMed trades at 16 times trailing earnings - well below its averages over the past one, three, and five years.
"In fact, the stock trades at a discount to five-year norms based on price/sales, price/cash flow, price/book, and enterprise ratio. Based on all five valuation metrics and using five-year averages, PetMed has an average implied price of $19.