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This under-the-radar e-commerce stock aims to expand its market

techsm5

E-commerce stocks have cooled significantly in 2022. Pet Med Express (PETS 2.43%) is not unique among this cohort in that it has fallen around 40% from its previous highs in 2022. However, while many of these stocks were unprofitable or trading at exorbitant multiples , PetMed Express is profitable, trading at a reasonably modest valuation and has plans for expansion.

Additionally, PetMed Express is a bit rare among e-commerce stocks in that it pays a dividend. And it’s not just any dividend – PetMed Express shares are yielding almost 7%. Let’s take a closer look at the online pet pharmacy retailer and why it looks like an attractive buy for risk-tolerant investors in the future.

A golden retriever gets checked out at a vet's office.

Image source: Getty Images.

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PetMed Express is an online pet pharmacy that sells prescription and nonprescription pet medications and other products to US pet owners for animals like dogs, cats, and horses. The Florida-based company has a customer base of approximately 2 million and an excellent network promoter score of 80, placing it in the world-class category for customer experience.

Unfortunately, the 26-year-old company has struggled in recent quarters. For example, in the last quarter, revenue fell 3% year over year, while earnings per share fell 28%. But the first stages of a turnaround could be underway. For example, management says its “Autoship & Save” subscription sales are growing and now account for 39% of revenue (a 15% increase sequentially), which will help the company move from one-time sales to a model more attractive recurring revenue. .

PetMed Express is also striving to expand beyond what it calls the $10 billion pet medicine market and into the much larger total pet market of $123 billion. with a focus on the health and welfare of companion animals.

New CEO Matthew Hulett says the company’s new vision is that “every pet deserves to live a long, happy and healthy life” and that to achieve this vision “PetMed is moving from simple pet medicine retailer to that of Pet Health Experts, a market leader in pet healthcare expertise.” If successful in expanding into this adjacent area, it could significantly increase the company’s revenue and total addressable market.

The company is even embarking on telemedicine for pets. Through its new Vet Live platform, PetMed Express can connect pet owners with thousands of licensed veterinarians any time of the day or night. Although this is still a nascent business, it could help PetMed Express differentiate itself from the competition and increase customer loyalty.

tail wagging dog

PetMed Express is appealing for a number of additional reasons. The pet care industry is resilient because most people will continue to buy food, medicine, and other necessities for their pets, even during an economic downturn.

Additionally, the pet population in the United States has increased significantly since the onset of the COVID pandemic. The American Society for the Prevention of Cruelty to Animals (ASPCA) says 23 million Americans have adopted pets during the pandemic. Hulett says 70% of American households now have a pet.

These animals are also living longer, thanks to advances in veterinary care and owners’ increased interest in wellness and nutrition. This larger pet population should be a long-term tailwind for an online pet retailer like PetMed Express.

Dividend and valuation

PetMed Express stands out in the e-commerce space by paying a large dividend. Its yield of almost 7% is much better than the market average or what an investor might get from a 10-year Treasury note. PetMed Express has paid a dividend consistently since 2009 and has increased its annual dividend payout for 13 consecutive years.

One cause for concern that should be noted is that the dividend does not appear to be on the most stable ground from a dividend coverage perspective. The dividend payout ratio is currently over 100%, meaning the company is paying out more dividends than it earns.

However, PetMed Express has a significant amount of cash, which it could theoretically use to support the dividend until earnings increase. Although free cash flow may be a better indicator to gauge the safety of a dividend, a company’s free cash flow has fluctuated lately.

In any case, this is a situation worth monitoring in the future. While I like the performance and track record here, I have to admit that it’s probably not the strongest dividend yet.

At 18 times forward earnings, the valuation is also slightly above the average multiple of S&P500, but by no means prohibitive. The company has a strong balance sheet with no long-term debt and $97 million in cash as of the last quarter.

Look forward

With a reasonable valuation, strong balance sheet and attractive dividend yield, PetMed Express looks like an attractive buy for risk-tolerant investors as it continues to progress through the early stages of its new strategy.

Due to the company’s high reputation among customers, as evidenced by its top net promoter score, it seems reasonable that it can successfully enter the global pet market, which would give it a long growth track.

techsm5

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