Grading Three Pet Care Retailers
See how online pet retailers Chewy Inc., PetMed Express Inc. and PetIQ Inc. grade on certain key criteria that you need to consider in order to capitalize on people’s passion for their pets.
Three Pet Care Industry Stocks That Could Really Purr … or Bark
The pet care industry has been growing steadily for years, supported by increased pet ownership and the passion people have for their pets. Pet owners have been spending more time with their pets, as many people have been working from home. The coronavirus pandemic and stay-at-home orders have created something of a pandemic pet boom, and they may have also reinforced trends supporting the long-term growth of the pet care industry.
The pet care industry benefits from favorable growth tailwinds as pet owners increasingly develop strong relationships with their pets. Companion animals are increasingly viewed as family members, significantly increasing owners’ willingness to spend on pet health care, food, snacks, toys, clothing, supplies and even insurance for their favorite four-legged friend, fish, bird or reptile.
Chewy Inc. (CHWY) is an online seller of branded and private-label pet food and grooming supplies. The company’s brands include A Pet Hub, A&E Cage Company, ABO Gear, Acurel, Addiction, Advance, Advantage, Apocaps, Atopia, Audbudon Part and Ark Naturals. The company’s product offerings by categories include tablet, chewable tablet, solution, capsule, injectable, suspension and ointment. The company offers over 2,000 brands with its operation in 17 locations. The company offers its products and services through its website and mobile applications.
PetMed Express Inc. (PETS), doing business as 1800PetMeds, is a pet pharmacy. The company markets prescription and non-prescription pet medications, and other health products for dogs and cats, direct to the consumer. It offers a selection of products for dogs and cats. Its product line contains approximately 3,000 stock-keeping units (SKUs) of pet medications, health products and supplies. Its products include brands of medication, such as Frontline Plus, K9 Advantix II, Advantage II, Heartgard Plus, Sentinel, Revolution and Rimadyl. It also offers additional pet supplies for sale on its website that are drop-shipped (purchased from a third party and shipped directly to the customer). These pet supplies include food, beds, crates, strollers and other pet supplies.
PetIQ Inc. (PETQ) is engaged in manufacturing and distributing pet medication and health and wellness products to the retail channel in the U.S. The company provides retail stores with third-party brands, including Frontline Plus, Heartgard Plus, PetAction Plus, Advecta II, Pet Lock Plus, Pet Lock Max, TruProfen and Heartshield. It distributes the products through veterinarian, retail and e-commerce channels. The company offers its products and services in a range of categories, including veterinary services, prescription and over-the-counter (OTC) medications and supplies, and health and wellness products.
As of February 16, 2021, Chewy had a $44.9 billion market capitalization. Chewy’s stock is up 27.6% in 2021, 4.5% in the previous five trading days and 296.7% in the past year. The company is expected to report its fiscal fourth-quarter earnings in early April. Currently, Chewy’s price-earnings ratio is not applicable due to negative earnings. Chewy’s trailing 12-month revenue is $6.46 billion with a negative 2.7% net profit margin. Year-over-year quarterly sales growth most recently was up 44.9%. Analysts expect adjusted earnings to increase from negative $0.38 to negative $0.10 per share for the next fiscal year ending December 2021 before turning positive the following year.
PetMed Express’ stock is up 18.2% in 2021, 7.9% in the previous five trading days and 33.7% in the past year. The company is expected to report its fiscal fourth-quarter earnings in the next two months. Currently, PetMed Express’ price-earnings ratio is 24.2. The company’s trailing 12-month revenue is $311.8 million with a positive 9.9% net profit margin. Year-over-year quarterly sales growth most recently was up 10%. Analysts expect adjusted earnings to increase from $1.59 to $1.76 per share for the next fiscal year ending March 2022 before growing to $1.86 per share the following year.
PetIQ’s stock is down 6.1% in 2021, up 1.1% in the previous five trading days and up 6.2% in the past year. The company is expected to report its fiscal fourth-quarter earnings in the next week. Currently, PetIQ’s price-earnings ratio is not applicable due to negative earnings. The company’s trailing 12-month revenue is $770.2 million with a negative 10.1% net profit margin. Year-over-year quarterly sales growth most recently was down 12.8%. Analysts expect adjusted earnings to increase from $0.55 to $1.39 per share for the next fiscal year ending December 2021 before growing to $1.93 per share the following year.
According to ProShares Perspectives, 85 million households have pets, representing nearly 70% of U.S. households, while just 33 million include children. The pandemic has accelerated pet adoption and fostering, resulting in a 60% year-over-year increase in the first quarter of 2020. Global pet industry sales are forecast to grow from $190 million in 2018 to $270 billion by 2025.
Grading Chewy, PetMed Express and PetIQ Stock
Stock evaluation requires access to huge amounts of data and the knowledge and time to sift through it all, making sense of financial ratios, reading income statements and analyzing recent stock movements. To help individual investors with that daunting task, AAII created A+ Investor, a robust data suite that condenses data research in an actionable and customizable way suitable for investors of all knowledge levels.
AAII’s proprietary stock grades come with A+ Investor. These offer intuitive A–F grades for each of five key investing factors: value, growth, momentum, earnings revisions and quality. Here, we’ll take a closer look at Chewy, PetMed Express and PetIQ stock grades for growth, momentum and earnings estimate revisions.
Chewy, PetMed Express and PetIQ Growth Grades
Growth investing builds on the idea that stocks of companies exhibiting strong, consistent and prolonged growth outperform those of slower-growth companies. AAII measures several dimensions of growth, including year-over-year increases in sales and earnings, long(er)-term historical sales and earnings growth rates and analyst-forecasted long-term earnings growth.
The components consider a company’s success in growing its sales, earnings per share and operating cash on a year-over-year basis for the latest reported fiscal quarter and on an annualized basis over the last five years. High rates, especially compared to the sector median, lead to better scores.
Chewy has a Growth Score of 85, which is very strong. Meanwhile, PetMed Express has a Growth Score of 56, which is average and PetIQ has a Growth Score of 60, which is also average.
Chewy, PetMed Express and PetIQ Momentum Grades
Momentum grades help uncover stocks experiencing anomalously high rates of return; research finds that stocks with high relative levels of momentum tend to outperform, whereas those with low levels of momentum tend to continue underperforming. Momentum is based on the price change of a stock over a specified period relative to all other stocks.
Chewy has a Momentum Score of 76, which is strong. Meanwhile, PetMed Express has a Momentum Score of 29, which is weak.
PetIQ has a Momentum Score of 50, which is average. This means it ranks in the middle of the pack of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters. The most recent quarterly price change is given a weight of 40% and each of the three previous quarters are given a weighting of 20%.
Chewy, PetMed Express and PetIQ Earnings Estimate Revisions Grades
Earnings estimate revision scores take into account the magnitude of a company’s earnings surprise in its last two reported fiscal quarters. Often, positive surprises beget further positive surprises — or at least continued sales growth (the exact opposite is generally true, too)
Estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. Earnings estimate revisions are based on the statistical significance of a firm’s last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Chewy has an Earnings Estimate Revisions Score of 57, which is neutral. Meanwhile, PetMed Express has an Earnings Estimate Revisions Score of 37, which is negative and PetIQ has a score of 28, which is also negative.
Other Chewy, PetMed Express and PetIQ Grades
In addition to growth, momentum and earnings estimate revisions, A+ Investor also provides grades for value and quality. Successful stock investing involves buying low and selling high, so valuation is an important consideration for stock selection. Buying stocks that are going to go up typically means buying stocks that are undervalued in the first place, although momentum investors may argue that point.
AAII’s A+ Investor value grade derives from a stock’s value score. The value score is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio. The score is variable, meaning it can consider all six ratios or, should any of the six ratios not be valid, the remaining ratios that are valid. To be assigned a value score, stocks must have a valid (non-null) ratio and corresponding ranking for at least two of the six valuation ratios.
Stocks with a value score from 0 to 20 are considered deep value, those with a score between 21 and 40 are a good value and so on.
Like the value grade, AAII’s A+ Investor quality grade comes from the percentile rank of key metrics. Specifically, the quality grade is the percentile rank of the average of the percentile ranks of the return on assets (ROA), return on invested capital (ROIC), gross profit relative to assets, buyback yield, change in total liabilities to assets, accruals, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the remaining measures that are valid. To be assigned a quality score, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The quality score is used to assess the underlying “quality” of a particular stock. A higher quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period of 1998 through 2019.
Stocks receive better grades (higher scores) for having higher scores for the quality sub-components and worse grades (lower scores) for lower scores for the sub-components.
One of the most popular techniques to search for both value and growth centers around stocks with low price-earnings ratios relative to their earnings growth rates. The price-earnings-to-growth ratio — popularly known as the PEG ratio — is computed by dividing the price-earnings ratio by the earnings per share growth rate.
One of AAII’s stock screens that uses PEG ratios and price strength to find growth stocks trading at a reasonable price is AAII’s Value on the Move PEG With Estimated Growth Screen. This screen has a 13.9% theoretical annual return since inception.
Combining value with price and earnings momentum screens should help identify reasonably priced stocks that are on the move. However, keep in mind that the purpose of this screen is to illustrate, with real firms, a potentially useful combination of value and momentum analysis.
These two key factors, when combined with the above, provide a holistic view into a particular stock. Further, by joining A+ Investor you can see whether Chewy’s, PetMed Express’ or PetIQ’s stock passes any of our 60+ stock screens that have outperformed the market since their creation.
Chewy, PetMed Express and PetIQ Stock: Bottom Line
Overall, Chewy stock has a Growth Grade of A, a Momentum Grade of B and an Earnings Estimate Revisions Grade of C. PetMed Express stock has a Growth Grade of C, a Momentum Grade of D and an Earnings Estimate Revisions Grade of D. Meanwhile, PetIQ has a Growth Grade of C, a Momentum Grade of C and an Earnings Estimate Revisions Grade of D.
Whether this makes them good investments depends on your goals and risk tolerance. AAII can help you figure out both and identify which investments align with what works best for you.
We do so through a program of education that teaches you to invest for yourself and become an effective manager of your own wealth — no more relying on others for your financial independence. You can rely on AAII for timeless articles on financial planning and stock-picking, unbiased research and actionable analysis that makes you a better investor.
A+ Investor adds to that qualitative teaching by giving you a powerful data suite that helps you whittle down investment decisions, find stocks, exchange-traded funds (ETFs) or mutual funds that meet your needs and understand your portfolio at a more detailed level.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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