PETQ - PetIQ: Steady Growth Play

2023-06-22 16:15:56 ET

Summary

• Today, we take a look at PetIQ, Inc., which markets both products and services to the growing pet retail sector.
• The company posted solid quarterly results in May and is growing revenues in the mid to high single digits.
• An investment analysis follows in the paragraphs below.

A dog can’t think that much about what he’s doing, he just does what feels right. ”? Barbara Kingsolver.

Today, we take a deeper look at PetIQ, Inc. ( PETQ ) . The company provides both services and products to owners of pets via various channels. PetIQ continues to churn out revenue growth in the mid to high single digits and is set to perform even if the economy continues to weaken. PETQ stock has performed well since late last year. Can the rally continue? An analysis follows below.

Company Overview:

This pet medication and wellness company is headquartered in Idaho and operates in two business segments, Products and Services. The latter includes diagnostic tests, vaccinations, prescription medications, microchipping, etc...at community clinics and wellness centers hosted at pet retailers. The company also markets products such as offers Rx pet medications, such as flea and tick control, heartworm preventatives, arthritis, thyroid, diabetes and pain treatments, antibiotics, and other specialty medications offer under various brands like SENTRY, Sergeants, PetLock, Heart Shield Plus, etc.

Services make up just over 10% of overall revenue, but is currently the faster growing of the two business segments. PetIQ paid $26.5 million to acquire Rocco & Roxie LLC in January of year. Rocco & Roxie generated approximately $29 million of net sales in FY2022 from stain and odor eliminators. The stock trades right around $15.00 a share and sports an approximate market capitalization of $435 million.

First Quarter Results:

The company posted its first quarter numbers on May 9th. PetIQ, Inc. had non-GAAP profits of 45 cents a share. This was a solid increase over the 34 cents a share PETQ delivered in the same period a year ago. Revenues rose just over five percent on year-over-year basis to $290.5 million, which beat expectations by some $13 million. Management also reiterated its previous FY 2023 net sales outlook of between $970 million to $1,030 million.

Services revenues came in at $31.5 million for the quarter, an increase of 12.6% from 1Q2022. Product revenues rose 4.5% to $259 million. EBITDA had an impressive increase of nearly 52% from the same period a year ago to $26.7 million. The company continues to increase the amount of overall revenues that come with branded products that carry higher margins.

Analyst Commentary & Balance Sheet:

Despite a decent market capitalization, the company gets sparse coverage on Wall Street. Both Benchmark & Co. ($30 price target) and Raymond James ($16 price target) reissued Buy ratings after the company's fourth quarter earnings posted in February. Truist Financial ($20 price target) did the same after first quarter results hit the wires last month.

Just over six percent of the outstanding shares are currently held short. There has been no insider activity in the stock so far in 2023. As of the end of the first quarter, the company had just over $25 million of cash, a bit over $150 million in total liquidity, and $452 million in long term debt.

Verdict:

The current analyst firm consensus has the company making 70 cents a share as revenues rise some seven percent in FY2023 to $993 million. Similar sales growth is projected in FY2024, when profits are projected to rise to just above a buck a share. The company made 61 cents a share of profit in FY2022.

The company appears to be executing well and has delivered solid results within various economic environments over the past half decade. I also believe demand for their products is somewhat inelastic. In a recession, people tend to cut down on travel, dinning out, new furniture, etc.... before cutting back on pet care, as animals have become more and more "part of the family" in recent generations. PetIQ continues to incrementally take market share, as it is growing faster than the pet retail industry as a whole.

That said, the shares seem fairly valued at approximately 21 times forward earnings, given mid to high single digit revenue growth and a somewhat leveraged balance sheet . If PetIQ, Inc. stock drifted down to the $12 level or so, I would be tempted to start to accumulate a small position. However, they are not compelling at current trading levels.

In politics always big dog eat first .”? Jeff Morco.

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