Streetwise
Lauren Rudd
Sunday, January 31,
2010
Dogs and Cats of the Investment World
If you are going to invest on Wall Street, please be
cognizant of the fact that there is no relationship between historical and
future stock prices. The past will not predict the future unless you have the
exact same initial conditions, which is impossible. Does that mean you ignore
historical data? No, you simply need to put the data in proper perspective.
Unfortunately, whenever there is an increase in volatility,
or a downward trend in share prices, there is a tendency on the part of
investors to lean on boisterous prognosticators for advice. That is a mistake.
Never take the opinions you hear and read (including mine) to be the gospel.
Continuing with that line of reasoning, you should never let
anyone pressure you into making a quick investment decision. A person selling an
investment is unequivocally biased. It does not matter how many letters they
have after their name, how sincere they appear, or how long you have known them,
they sell for a living. Always obtain an independent second opinion, whether
from your own research or from an unbiased professional.
A no nonsense investment strategy will help you get through
what will likely be at least another year of economic turmoil. Furthermore,
virtually everyone, perhaps with a little training, can learn to select quality
investments that will stand up to the test of time. For example, you might want
to give some thought to PetMed Express.
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 their four legged companions.
Business Week once estimated that as a nation we spend about
$41 billion per year on our pets, with an expected compounded annual growth rate
of 12.3 percent going forward. Animal farm-care costs are currently in the
neighborhood of $25 billion and growing rapidly, according to the Congressional
Office of Technology Assessment.
At the same time, the average pet owner or breeder is always
looking for ways to save money on pet health care, while still maintaining the
same level and quality of care. Almost reminds you of stalled health care
program in Congress. Enter PetMed Express (PETS). My daughter, who is a
veterinarian and does not endorse PetMed Express, does acquiesce to 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.
For the third-quarter ended Dec. 31, PetMed reported
quarterly earnings of $5.6 million, or 25 cents per share, compared with $4.9
million, or 21 cents per share a year ago. Revenue at the company, which ships
its products directly to customers, rose 11 percent to $48.4 million, helped by
double-digit growth in reorder sales, up 17 percent at $37.6 million and lower
expenses. General and administrative costs fell 2 percent. The company’s average
order size was about $78 for the quarter, unchanged from the year-ago period.
When I last talked about the company a year ago, my earnings
estimate for fiscal 2009 was 96 cents per share and $1.05 per share for fiscal
2010, with a with a 12-month target price of $18 per share. So how did the
company do? Last year’s earnings came in at 98 cents per share and the stock
recently closed at $19.04.
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 14.75 percent, produces an intrinsic value of $28 per
share. A more conservative free cash flow to the firm approach produces an
intrinsic value of $43 per share. Note that the company has no long term debt.
I am going to raise my earnings estimate for this fiscal year to $1.16 per share
and 1.30 for fiscal 2011, with a projected 12-month target price on the shares
of $22, for a potential gain of 15.8 percent.
