The Idea List: Issue #5
This week I analyze PetMed Express, Equity Commonwealth, and Netgear
PetMed Express (PETS)
I came across PetMed Express while looking at low P/FCF stocks and was surprised to see that it was down 72% over the last year. This company is a retailer of pet pharmaceuticals, flea/tick treatments, pet food, and other accessories. Currently PETS has a market cap of $105M and has no long term debt. PetMed has historically had high returns on equity, but lately profitability has suffered. Part of the problem was the company got a boost from COVID spending that is now fading, and there is increased competition such as Amazon. In 2023, PETS suffered operating loss due to a tax accrual charge, increased marketing spend, and stock based compensation. If the company is a melting ice cube, at least they have no debt and recently suspended their dividend. Looking at the financials, if PETS can maintain its current revenue of $256M, applying a 9% operating margin and 25% tax rate gets an estimated earnings of $17.3M. Dividing this earnings figure by a 12% discount rate, and adding back the $53.5M of cash from the balance sheet gets an equity value of $197.5M, or $9.70 a share. Based on this, PetsMed is quite undervalued, but I may want to see if revenue and operating margins stabilize in case this is a value trap.
Equity Commonwealth (EQC)
Equity Commonwealth is a REIT that is trading near its net current asset value. This is strange because real estate companies usually have a lot of debt. What is going on here is that EQC has liquidated its real estate portfolio except for four properties and currently has $2.16B in cash and no debt. The late Sam Zell was in charge of this company and it appears they hold all of this cash waiting to buy distressed real estate. Now with short term interest around 5%, the company makes more money from its interest on cash than it does on gross rent from its properties. Additionally, last February the company paid a $4.25 special dividend. Calculating the net current asset value gets us about $19.00 a share after considering the preferred stock, EQCs current price is $18.60. This price doesn’t even factor in the value of their real estate, which is probably a couple of dollars a share. I think this stock is interesting because you’re basically buying a short term treasury bond that also has optionality of buying more real estate, doing share buybacks (which the company has been doing), or liquidating and paying out the proceeds.
Netgear (NTGR)
Netgear caught my eye because it is a household name that nearly trades as a net-net. The company used to have a stock price of $43 in 2021, but now trades at $14.85 with a market cap of $440M. NTGR sells home and business wireless networking equipment, but I believe they have faced increased competition lately. Looking at the balance sheet, Netgear has $748M in current assets, $284M of that is cash while $249M of current assets are tied up in inventory. The company has total liabilities of $312M, but no long term debt. Subtracting total liabilities from current assets and adding back capital lease obligations gets a net current asset value of $465.7M or $15.72 a share. From these figures Netgear is a net-net stock, although I might want a bit more margin of safety before buying.