PetMeds- Huge Short Squeeze Potential?
PetMeds Express (PETS on nasdaq), is an online pet pharmacy under the name 1800petmeds, offering prescription and nonprescription medication and health products for animals. This write up is more about the potential of what could be, should management choose to do something with the cash balance and return it to shareholders (more at the bottom).
Well positioned operation
For starters, the company operates in a smaller, more niche market, with it being the largest in the online pet need market. We think online sales do have a runway for growth, considering the ease of ordering online vs through a vet directly, especially for prevention products such as to protect against ticks and worms for dogs. With the nature of the business, it means very little capex, with infrastructure already in place and limited opportunities to further expand their reach, beyond advertising and improving brand recognition. Sure the company could seek out an acquisition, however it remains to be seen how that would affect margins, as well as add value to shareholders. Year over year, revenue is still growing, albeit at a slow pace (year over year up around 10%, quarter over quarter flat), and may continue to face more headwinds as well.
Still plenty of risk
There’s also plenty of things not to like about the company, from being exposed to the potential of another pharmacy like Express Scripts, to Amazon entering and stealing market share. the company isn’t insulated from outside forces at all, even if the business does yield customer loyalty, evident by increasing competition as of right now, having an impact on margins and customer acquisition costs. The competition has and will continue to result in the company discounting products to keep customers, which in the long term should hurt the companies profitability, should it continue.
Why we like it
Now for why it’s drawn our attention. The company has $93 million in cash with a market cap of $486 million. Cash on hand is about 20% of the market cap, with no debt and only liabilities for inventory. The company has next to no capex spend, with around 2 million last year total, because of its capital light operation. The company also has a near 5% dividend, which based off last years cash flow, is covered by operating cash flow with a payout rate around 50%. Even with a weak quarter last quarter, with margin pressures, the company still added another $15 million to the balance sheet after the dividend was paid. Now finally the last aspect. There is over 50% of shares short on this name, even after a huge drop from north of $50 just last year. This could offer a huge short squeeze should management initiate a huge share buyback, for say $80 million, or over 15% of the float.
The company is super cheap at these levels, and the company has a chance to reward shareholders while taking advantage of a cheap share price to buyback stock. Even then the company would still be debt free, with net cash on the balance sheet. This also would mean the company has even more FCF after dividends, with less in the way of dividends needed to pay with less shares outstanding. The savings in dividend payments alone would have a higher ROE than what the company is currently doing in holding all that cash, collecting minimal interest payments. This would yield a company still debt free in a non cyclical, yet competitive business, in which they should more than continue to operate profitably and pay the dividend. The company could even divert FCF after paying the dividend each quarter furthur to buybacks, to become a shareholder return story rather than a growth story which it no longer is.
Giving back to the shareholders
The company could offer over a 10% FCF yield and still offer GDP type revenue growth, which overall wouldn’t be a bad overall return. Sure a lot of the cash flow is from selling existing inventory and accounts payable expanding, however there is still potential for a share buyback to reward shareholders for their patience. This is all speculation on our part, but we do think this is what management should look at, to reward investors who are underwater and to shake the large shorts holding this troubled company in the shorter to long term.