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Berko: Pet service is ducky; you can work after retirement

By Malcolm Berko

Published: January 29, 2017, 6:03am

Dear Mr. Berko: I’m a 65-year-old single woman and, using your column, I’ve picked some good stocks that have nicely grown. The value of my individual retirement account is now $302,000. I just ordered some thyroid medication for my cat from 1-800-PetMeds and was impressed with the company’s prices and service. I discovered that it’s a public company and would like your opinion on whether I should buy 200 shares for my IRA.

Also, I began taking Social Security payments at 63, and now I need to go back to work so I can afford to pay for my health insurance. What a crock! Could you please tell me how much I can earn before Social Security starts deducting extra money from the wages I will earn?

— R.E., Port Charlotte, Fla.

Dear R.E.: PetMed Express (PETS-$21) is a swell modest-sized retail pet pharmacy selling prescription and nonprescription medications and other health care products for miniature pigs, sugar gliders, boa constrictors, chinchillas, kinkajous, capybaras and pygmy goats, plus cats and dogs.

Revenues grew from $162 million 10 years ago to $245 million in 2016. Earnings almost doubled in that same time frame, from 60 cents a share to $1.10 last year, while the dividend — initiated at 30 cents in 2009 — is now 76 cents and yields a solid 3.4 percent. The company’s website (www.1800petmeds.com) is responsible for 76 percent of revenues, while PETS’ telephone contact center and direct mail generate the remaining revenues. Prescription drugs account for 50 percent of revenues, and nonprescription items (food, shampoo, vitamins, bedding, etc.) make up the remaining 50 percent.

PETS is an uncomplicated company with 175 employees, zero debt, no preferred stock, no pension plan obligations and only 21 million shares outstanding, and all business activities are conducted from its new corporate headquarters in Pompano Beach, Fla. Since 2006, profit margins have improved by nearly 50 percent, to 10.6 percent, and today management has over $52 million in cash. Last quarter’s sales moved briskly higher as PETS began experimenting with data-based marketing and social media advertising. Last year, new customer count had grown by 6.6 percent on a year-over-year basis, and reorder revenues had jumped 7.4 percent. Customer acquisition costs had fallen by 32 percent. Because data-based marketing allows PETS to stay focused and encourages continuing involvement with customers, management expects robust revenue and earnings gains this year. Revenues for 2017 could grow to $261 million, and share earnings should increase to $1.21. And the dividend may be raised to 80 cents this year.

Wall Street reckons that by 2020, PETS could trade between $29 and $31. This conservative income/growth issue could earn an average annual total return of 8 percent. And PETS’ shares are considered favorable for the accounts of widows, orphans and the indolent rich. I think that a 200-share purchase would be a ducky addition to your IRA.

Over 65 percent of American households own pets. They spent about $55 billion on them in 2016, and 8 percent of that amount, $4.4 billion, was for medications. Today some 55 percent of PETS’ revenues derive from just eight states, though PETS is licensed in every state. So I’d not be surprised if a business development company or a hedge fund decided to acquire PETS. (TPG Capital bought Petco for $1.7 billion in 2006, and the Canada Pension Plan will buy Petco from TPG for $4.6 billion next month.) And building on PETS’ TV and new social media platform, the hedge fund or BDC could expand PETS’ business nationwide, bringing in much higher revenues.

Health insurance — ouch! I’m sorry you have to return to work, but there’s a bright side: You can! The 2017 earnings limit for people under 66 is $16,920. Social Security deducts $1 from your benefits for each $2 you earn over that amount. Last year, the earnings limit for folks under 66 was $15,720. The year before, it was $14,570. The 2017 earnings limit for folks who turn 66 this year is $44,880, and SS deducts $1 from your benefits for each $3 you earn over $44,880 after the month you turn 66.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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