First, a little background.
The worldwide market for animal health care, excluding bulk feed and nutrition products, is a growing, multibillion-dollar industry. Animal health care is dominated by several large and mega-cap companies, which have distinct operating divisions (from various acquisitions).
Recent press coverage re-affirms this trend is still strong; the American Pet Products Manufacturers Association (APPMA) reported that pet ownership has again reached a new high in 2007. Spending on pets overall and medications in particular are expected to rise in the high-single digits. In a December 2007 article for the Web site Small Business Trends, the CEO of Embrace Pet Insurance predicted that "online veterinary pharmaceuticals will become more mainstream. Pet lovers want, and are demanding, the same treatment options for their pets as they can get for themselves."With the recent credit panic in the market, it appears that investors must be thinking of PETS as a consumer discretionary stock, lumping it in with PetSmart (PETM) and other struggling retailers. For starters, as this article is being written, retail sales from Kohl's (KSS - Get Report), Costco (COST - Get Report), J.C. Penney (JCP) and Wal-Mart (WMT - Get Report) are coming in way better than expected. This is also a positive for PetMed. Also, PetSmart, which we feel is not as strong a play as PetMed, has been gaining traction. In fact, a JPMorgan analyst recently upgraded shares of PetSmart, calling the pet products supplier "unpriced, insulated from inflation and poised to benefit from the federal government's economic stimulus package" PetMed has beaten earnings the past four quarters in a row and eight out of the last 11 quarters. The company has a strong balance sheet: $50 million in cash, zero debt, 60% quarterly earnings growth and 10%-plus profit margins. It is also worth pointing out that PetMed has a mammoth size short-position of 18%, or about 4.1 million shares. For all of the shorts to cover their bearish positions on a climb in stock price, it would take them about 19 days to cover. We feel there are lots of factors pointing to good things to come for PetMed. We'll see on Monday.