PetMed - Hounded by Doggish Performance

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TECHNOLOGY TRADER: Cat and Mouse at PetMed by Bill Alpert

• Highlighted companies: PetMed Express (PETS)
• Summary: An in-depth look at online pet-supply retailer PetMed Express (PETS). Despite earnings growth of 20% annually, its shares have fallen 40% since March. Its present P/E multiple is 20. The article highlights two serious uncertainties: 1) An ongoing legal battle between former CEO and founder Marc Puleo and Yali Golan. Golan claims the idea of selling pet medicines by mail order was his, and that Puleo secretly agreed to share half his pay; his name was withheld from filings because Golan served prison time for cocaine distribution. Puleo and PetMed acknowledge Golan's hidden involvement through a shell company, but call the compensation-sharing document produced by Golan a forgery. 2) More than half of PetMed revenues come from treatments for fleas, tick and heartworm — products primarily sold by veterinarians. To avoid angering the vets, who promote their brands, manufacturers refuse to sell their products to direct marketers like PetMed. PetMed is bolstered by the recent successful legal campaign of 1-800 Contacts, which got contact lens makers to supply the product it sells in competition with eye doctors. But without similar legal backing, PetMed is currently forced to furtively source its product from a changing cast of vets and wholesalers. "That cat-and-mouse game could be a risk for the stock." In Q2, PetMed earned $20m, or .20/share, on sales of $51 million. Speculators are short about 12% of all shares.
• Quick comment: Catablast Media suggests recent weakness in the pet-stocks industry presents a buying opportunity to load up on a company that should continue to capitalize on the "pet boom." Douglas McIntyre finds it hard to see the investment appeal of the company. He points out that their distribution difficulties have already been disclosed by the company in a 10-k filing: "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..." In its Q2 earnings release, the company also announced a share buyback of $250m, which would reduce the share count by approximately 7%.

PETS 1-yr Daily Chart