Streetwise for Sunday Jan 18, 2009

Streetwise

Lauren Rudd

Sunday, January 18, 2009

There Are Bears Everywhere

It is winter and the bears of Wall Street are certainly not hibernating. Rather there is a bear at every corner and it is easy to see why, given that they thrive on worry and gnaw on any company whose future might appear to be the least bit cloudy.

Adding to the fun are the media, those bearers of bear chow who want to make sure you are intently cognizant of every company that missed earnings, might miss earnings or is thinking about missing earnings. Therefore, take heed and guard against being coerced into joining the lemmings as they run for the sea, frenzied by the sounds of the bears.

Selling off sound stocks needlessly will only turn temporary discomfort into permanent damage. Patience has always been an important virtue when investing. Now it is more important than ever.

Yes, the short-term economic outlook is bleak. Corporate earnings are weakening and continued uncertainty over the economy has been and will continue to take a toll on investor confidence. However, if you have more than a few years of investment experience, you have seen all this before. So what should you do short-term?

Despite the nearly over whelming roar of panicked lemmings, now is when you look for bargains...not the exit. However, you are going to have to look a bit harder and you might want to investigate smaller companies with a proprietary advantage.

Since I started with bears, let’s continue down that path and consider other animals, specifically pets. If you do not own one, take it from an incorrigible cat, dog and horse owner, as a rule pet owners spare no expense when it comes to the care of our four legged companions.

It is estimated that we spend approximately $41 billion per year on our pets, and that figure is expected to grow at a compound annual growth rate of 12.3 percent. At the same time, the average pet owner is always looking for ways to save money on pet health care without sacrificing quality.

Enter PetMed Express (PETS). My daughter, who is a veterinarian and does not endorse PetMed Express, does acquiesce on the point of its growing role in the pet industry as the nation’s largest pet pharmacy, offering prescription and nonprescription medicines for cats, dogs and horses at discount prices.

Founded in 1996, the company ships products directly to customers at a price generally less you would pay at your local veterinarian, although according to my daughter a number of vets will match PetMed’s prices if asked.

When I last wrote about the company a year ago, my 2008 earnings estimate was for $0.82 per share for the 2008 fiscal year and 90 cents for 2009, with a 12 month target price on the shares of $15. The company posted 2008 fiscal year earnings of $0.82 per share and the shares recently closed at $15.83, up from $13, for a 12-month gain of 21 percent in down market.

For the company’s fiscal 2009 second quarter ended September 30, 2008, net income was $5.8 million or $0.25, as compared to $4.5 million or $0.18 diluted per share for the quarter ended September 30, 2007, an increase of 33 percent.

Net sales for the quarter ended September 30, 2008 were $59.6 million, compared to $51.5 million for the quarter ended September 30, 2007, an increase of 16 percent.

The intrinsic value of the shares is impressive. Using a discounted earnings approach, with a 15 percent discount rate and a conservative earnings growth rate of 16 percent, produces an intrinsic value of $25 per share. A more conservative free cash flow to the firm approach produces an intrinsic value of $41 per share. Note that the company has no long term debt.