PetMed Express, Inc.

PETS Details

PetMed Express, Inc. (NASDAQ: PETS) is an American pet pharmacy that delivers prescription and non-prescription pet medications and other health products for dogs, cats, and horses directly to its consumers through a toll-free number and on the internet. The company’s current product line contains around 2,500 Stock Keeping Units (SKUs) of the most popular pet medications, health products, and supplies. In addition, PETS also offers additional pet supplies such as food, beds, crates, stairs, strollers, among others, through its website which are drop-shipped to its customers by third parties. The company is licensed to dispense medicines in all 50 states. As of May 20, 2021, the company’s market capitalization stood at USD 585.23 million.

Product Mix (Source: Investor Presentation, February 2021)

FY21 Results: The company reported an 8.83% increase in net sales to USD 309.22 million in FY21 (ending March 31, 2021) as compared to USD 284.13 million in FY20. Net income increased by 18.38% in FY21 to USD 30.60 million, compared to USD 25.85 million in FY20. The company acquired 443,000 new customers during FY21 vs 421,000 new customers in FY20. It declared a quarterly dividend of USD 0.30 per share on its common stock.

Key Risks: Resistance from veterinarians relating to authorizing prescriptions to internet mail-order pharmacies, and competition from traditional retailers may cause the company’s sales to decrease and adversely affect its financial condition. In addition, all of the company’s operations are housed in a single location, which makes it more susceptible to business interruption in the event of damage or disruptions in its facility.

Outlook: In FY22, the company plans to explore alternative ways of acquiring new customers and adding value-added services, and to continue investing in its e-commerce platform and mobile app to optimize customer digital experience.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY22E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

PETS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: PETS stock fell 19.50% in the last three months and is currently at the lower end of the 52-week range of USD 27.10 to USD 57.00. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 34.08. On the technical chart, the next support level is USD 27.10. Considering the increased e-commerce demand due to COVID-19, robust balance sheet, dividend yield, positive cash flow in FY21, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 28.85, down by 0.07% as of May 20, 2021.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

Farmers & Merchants Bancorp, Inc.

FMAO Details

Farmers & Merchants Bancorp, Inc. (NASDAQ: FMAO) operates as the bank holding company for The Farmers & Merchants State Bank, which provides commercial banking, retail banking, and other financial services to individuals and small businesses in Northwest Ohio and Northeast Indiana. In addition to traditional banking services, the company provides commercial, agricultural, and residential mortgage, and consumer and credit card lending products, loans for farmland, farm equipment, and livestock, home improvement loans, and loans for autos, trucks, recreational vehicles, and motorcycles. As of May 20, 2021, the company’s market capitalization stood at USD 241.27 million.

FMAO Loan and Deposit Growth (Source: Investor Presentation, Q4FY20)

Agreement to Acquire PFSB: On May 04, 2021, the company signed an agreement to acquire Perpetual Federal Savings Bank (PFSB) in a cash and stock transaction valued at USD 103.7 million. PFSB provides financial products and services in Ohio, and reported USD 391.0 million in total assets, USD 326.0 million in loans, USD 305.0 million in deposits, and USD 79.0 million in tangible equity, as of March 31, 2021.

Acquisition of OFSI: On April 30, 2021, FMAO announced the completion of the acquisition of Ossian Financial Services, Inc. (OFSI), the holding company of Ossian State Bank. This represents the company’s third recent acquisition in Northeast Indiana and is in line with its expansion strategy commenced in 2018. With the addition of OFSI, the total assets of the company have nearly doubled to USD 2.2 billion.

Q1FY21 Results: The company reported a 7.0% increase in net interest income to USD 15.04 million in Q1FY21 (March 31, 2021) as compared to USD 14.05 million in Q1FY20. Net income for Q1FY21 increased by 19.59% to USD 4.91 million, compared to USD 4.11 million in FY20. FMAO’s Net Interest Margin in Q1FY21 was reduced to 3.33% as compared to 3.75% in Q1FY20. In Q1FY21, the company’s total deposits increased by 5.49% to USD 1.68 billion from USD 1.60 billion in Q4FY20.

Select Financial Data (Source: Q1FY21 Financial Results)

Key Risks: FMAO’s loan portfolio has a large concentration of real estate loans, concentrated particularly around its primary markets in northwest Ohio and Northeast Indiana. The market value of real estate can fluctuate significantly in a short period due to market conditions. Also, real estate lending typically involves higher principal amounts and the repayment is generally dependent on income from the properties securing the loans. Economic events or governmental regulations outside of the control of the borrower could negatively impact the future cash flow and market values of the affected properties.

Outlook: The company stated that in FY20, it made significant progress in its strategic plan, which included customer acquisition and retention, talent development, accretive acquisitions, strong financial and operational performance, and digital strategy development. As a result, FMAO anticipates a significant increase in profitability in FY22, with an expected USD 2.1 million annual benefits to the net income in FY22 and beyond, as a result of reduced operating expenses and the contribution of additional sources of revenue.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

FMAO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: FMAO stock fell 4.67% in the last six months and is currently leaning towards the mid-point of the 52-week range of USD 19.50 to USD 27.58. We have valued the stock using the Price/Book Value-based relative valuation methodology and arrived at a target price of USD 24.86. On the technical chart, the next support level is USD 19.44. Considering the positive future outlook, stable growth, dividend yield, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 22.05, up by 2.32% as of May 20, 2021.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.