PetMed Express, Inc. (NASD:PETS); My Fair Value Estimate:
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Operating Earnings (OI)
o Enterprise Value (EV)
o Price-to-earnings Ratio (PE)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
PetMed Express is engaged in online pet healthcare. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
·The company’s debt relative to its Market Cap is <25%
·The % of shares short is >15%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·The company appears to have a tough year-over-year comparison in the upcoming quarter
·Operating Profit Margins are down sequentially and year-over-year
Despite the relative number of cons to pros, I deem the company good quantitatively because the company’s average ROIC (~25% over the last 10-years) make it seem likely it has durable competitive advantages. So, I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $23.5mm OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly good balance sheet and 5-yr average multiple of PE x 19.9**, I think OI x 10 is a reasonably conservative fair value, which equates to MFV of $16.59.
At a recent price of $19.14, the differential between market value and MFV is 15%, thus I think shares are overvalued.
Conclusion: I’ve owned shares for nearly a year, but MFV and BV have been declining. In fact, with recent declines, BV is now only up 16% over the last 5 years, calling into question my assumption that the company has durable competitive advantages. If it doesn’t have competitive advantages, it’s only good as a mean reversion candidate and I would revalue it relative to TBV, which is only $6.29. So, this one is in a gray area, i.e. it’s not clear if it’s experiencing a temporary downturn or a paradigm change to a company that warrants a lower valuation.
Given the uncertainty, I plan to sell a third of the position. I’ll either reallocate the funds to a company that’s relatively cheaper to MFV and isn’t challenging my assumptions currently (https://www.veriteventures.com/post/fonar-corporation-nasd-fonr-my-fair-value-estimate) or hold cash for a while.
My positioning: Long shares
For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)
*Post prepared using data as of 2/9/23
**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.