2023-03-11 07:33:26 ET
Summary
- PetIQ is a company operating in a very large market, the pet care and health industry; a market that will see little in the way of slowing down.
- The earnings came in according to estimates and production was up too, but in the short term, there might be headwinds as inflation bites down on consumer spending.
- But despite the short-term headwinds, the company is in a good position to capitalize from market tailwinds and deserves a buy rating.
Investment Thesis
The investment thesis for PetIQ (PETQ) is that it is a leading pet health and wellness company with a unique and integrated platform that provides affordable and convenient pet health solutions. With a growing pet population and increasing pet healthcare spending, PetIQ is well-positioned to capture market share and drive growth. Additionally, the company has a strong and experienced management team, strategic partnerships, and a proven track record of successful acquisitions.
While there are risks and challenges facing the company, such as competition and regulatory changes, PetIQ's attractive valuation and potential for growth make it an interesting investment opportunity. Based on the analysis of the company's financials, industry trends, and market outlook, the investment stance for PetIQ is a buy.
Market Tailwinds
PetIQ operates in the pet care industry, which is a rapidly growing market. The global pet care market is expected to reach $358 billion by 2027, growing at a compound annual growth rate ( CAGR) of 5.9% from 2020 to 2027. In the US alone, the pet care market was valued at $99 billion in 2020 and is projected to grow at a CAGR of 5.8% from 2021 to 2028.
Pet Care Market (Fortunebuisnessinsights)
One potential tailwind for PetIQ is the increasing number of pet adoptions and ownership. According to the American Pet Products Association , 70% of American households have a pet, and the number of pet owners is expected to grow in the coming years. As more people adopt pets, demand for pet care products and services is likely to increase, creating growth opportunities for PetIQ.
Pet Facts (American Pet Association)
Another potential tailwind is the growing trend toward premium pet care products and services. Pet owners are increasingly willing to spend more on high-quality food, supplements, and grooming products for their pets. This trend is expected to continue , and PetIQ has positioned itself well to capitalize on this trend by offering a wide range of affordable and high-quality pet care products.
Investors are also looking at PetIQ's expansion into e-commerce and its recent acquisition of VetIQ, which provides pet health and wellness products and services. The acquisition expands PetIQ's presence in the fast-growing pet health and wellness market and allows it to offer a wider range of products and services to customers.
Overall, PetIQ operates in a growing market with several potential tailwinds, including the increasing number of pet adoptions and the trend toward premium pet care products and services. Investors are closely watching PetIQ's expansion into e-commerce and its recent acquisition of VetIQ, and the company is well-positioned to capitalize on the growth opportunities in the pet care industry.
Revenue Breakdown
PetIQ, Inc has announced its financial results for the fourth quarter and full year that ended December 31, 2022. The company reported net sales and adjusted EBITDA in line with its 2022 full-year guidance, as well as record annual cash generation. These positive results are a testament to the Company's continued growth and success in the pet medication and wellness market.
Earnings Highlights (Earnings Report)
PetIQ's Chairman & CEO, Cord Christensen, stated, "We are pleased to report net sales and adjusted EBITDA in line with our 2022 full-year guidance as well as record annual cash generation. PetIQ captured a disproportionate amount of market share and outperformed the broader pet product categories in which we compete."
PetIQ's financial results for 2022 are impressive, with net sales of $921.5 million, which was in line with the Company's guidance of $920 million to $940 million. This is made up of the Product segment's net sales of $800.3 million and the Services segment's net revenues of $121.2 million.
In addition, net sales for PetIQ's manufactured products increased to 29.3% of Product segment net sales compared to 27.7% in the prior year. The gross margin also increased by 280 basis points to 22.8%.
The net loss for the year was $48.2 million, or a loss per share of $1.65, which included a $47.3 million non-cash goodwill impairment charge recorded in the third quarter of 2022, compared to a net loss of $16.0 million, or a loss per share of $0.57 in the prior year.
Guidance (Earnings Report)
However, adjusted net income was $17.7 million, or adjusted EPS of $0.61, an increase of 103.3% compared to adjusted net income of $8.3 million, or adjusted EPS of $0.30.
EBITDA was $59.8 million, compared to EBITDA of $48.9 million in the prior year, an increase of 22.4%. As previously disclosed in the Company's third quarter of 2022 earnings release, beginning in the fourth quarter of 2022, PetIQ changed its methodology of calculating Adjusted EBITDA to no longer add back non-same store sales, cost of sales, and expenses and has recast the prior year periods to conform to the new presentation. Based on this new methodology, Adjusted EBITDA was $77.7 million, compared to $69.7 million, an increase of 11.4%.
Cash Flows (Earnings Report)
Solely to allow investors to compare the Company's performance to the previously provided Adjusted EBITDA guidance, using its prior methodology, the Company would have reported Adjusted EBITDA of $94.1 million, compared to $92.9 million, an increase of 1.3% and in line with the Company's previously provided guidance of $93.0 million to $95.0 million for 2022.
PetIQ also completed a complementary, strategic acquisition of Rocco & Roxie, which helped the Company enter new pet product categories. PetIQ expects to significantly increase Rocco & Roxie's points of distribution and expand pet product offerings over the next few years.
Looking forward, Cord Christensen noted that PetIQ is well positioned for solid growth in 2023 across its Product and Services segments. He stated, "We believe we are well positioned for solid growth in 2023 across our Product and Services segments to attract more pet parents to our health and wellness offerings."
Risks
While there are potential tailwinds in the pet care industry that PetIQ operates in, there are also risks that investors should be aware of.
One major risk is the potential for increased competition. As more companies enter the pet care market, PetIQ may face increased pressure to lower prices or increase marketing expenses to maintain its market share. This could impact the company's profitability and growth potential.
Another risk is the potential for regulatory changes. PetIQ operates in a highly regulated industry, and changes to regulations could impact the company's operations and financial performance. For example, if new regulations were introduced that required more rigorous testing or increased safety standards, PetIQ could face increased costs to comply.
Additionally, PetIQ's growth strategy relies heavily on acquisitions, which carry its own set of risks. The company may face challenges integrating new acquisitions, such as cultural differences or difficulty in consolidating back-end systems, which could impact the company's financial performance.
Lastly, PetIQ's business is heavily reliant on pet owners' willingness to spend money on their pets' healthcare needs. Economic downturns or changes in consumer behavior could impact the company's sales and financial performance.
Investors should be aware of these risks and closely monitor how PetIQ is addressing them to make informed investment decisions.
Valuation and Conclusion
In terms of valuation, PetIQ appears to be trading at a discount to its peers in the industry. As of February 18, 2023, PetIQ's trailing P/E ratio stands at around 18.4x, compared to the industry median of 33.4x. Similarly, PetIQ's forward P/E ratio is around 16.2x, compared to the industry median of 27.1x.
PetIQ's price-to-sales ratio is also lower than the industry median, with PetIQ's ratio at 1.3x compared to the industry median of 3.6x. However, PetIQ's price-to-book ratio is higher than the industry median, with a ratio of 3.3x compared to the industry median of 2.3x.
Overall, it appears that PetIQ is undervalued compared to its peers in the industry, based on the aforementioned valuation metrics. However, it's important to note that there may be other factors that are not captured by these metrics, such as the potential impact of competitive pressures or regulatory changes.
In terms of the investment stance for PetIQ, it ultimately depends on an investor's individual investment objectives and risk tolerance. While there are certainly some potential tailwinds for the company, such as the growing demand for pet products and services, investors should also be aware of the potential risks facing the company, such as the impact of increased competition and regulatory changes.
Overall, PetIQ appears to have a strong position in the pet care industry and is trading at a discount to its peers, which could make it an attractive investment opportunity for investors with a long-term investment horizon and a tolerance for some degree of risk.
For further details see:
PetIQ Is A Bet On Steady Trends