Over the weekend, the shares of pet healthcare company PetIQ (NASDAQ:PETQ) lost nearly 10% of their value after Raymond James analyst Joseph Altobello lowered his price target on PetIQ stock to $39 per share from $42 per share.
Despite the fact that Altobello maintained his “Outperform” rating and cautioned investors not to completely abandon the shares, PetIQ stock had plunged to $27.30 per share this morning, a significant discount from the firm’s 52 week high of $43.93.
While Altobello’s remarks certainly weren’t complimentary to PetIQ stock, were they bad enough to warrant the steep decline that PETQ stock suffered?
Raymond James still believes that PETQ will deliver double-digit- sales and earnings growth over the next few years and the firm is expecting PetIQ’s net sales to surge 18% in 2019. Altobello revised his price target on PetIQ stock to correct an earlier estimate that he believed was too optimistic; at the time of the revision, the new price target was more than 25% above the price of PETQ stock.
Opportunity is Knocking
Now that PETQ is trading for $27.4 per share, that price target looks even better as it is more than 40% above the current price of PetIQ stock. The company is due to release its fourth-quarter and full-year results next week, and as long as those figures are in-line with expectations, PETQ stock should pop.
There’s a lot to like about PetIQ right now. By selling directly to pet owners products and services for pets that used to only be available only through veterinarians, PETQ has entered a unique niche. The firm has grown substantially, and it now has nearly 3,000 veterinary clinics around the country. Management believes that the company can continue to expand. The firm says its addressable market in the U.S. is around $41 billion, meaning there is plenty of room for growth in the country in the years to come.
What to Expect
If PetIQ’s Q4 results at least meet expectations next week, investors can expect PetIQ stock to rally. After posting strong Q3 results, management upped its full-year guidance. The company is expecting 2018 net sales of $515 million, a 93% increase from the previous year. Even more impressive is the company’s guidance for adjusted EBITDA,which management is expecting to come in between $40 million and $45 million, an increase of between 79% and 102% from the previous year.
Of course, those are just estimates and there’s a chance the firm could miss its guidance, but based on the strong results that the company posted for the first three quarters of 2018, its guidance looks achievable.
The Acquisition of VIP Petcare
In January, PETQ completed its strategic acquisition of VIP Petcare, a network of community clinics and wellness centers for animals. That purchase is expected to help PetIQ continue opening more clinics and retail locations in the U.S.. The deal cost PetIQ $100 million in cash, $30 million in promissory notes and about $90 million worth of stock.
PetIQ was forced to take on $75 million in new debt in order to make the purchase, but most agree that the addition of VIP Petcare will benefit PETQ over the long-term.
The purchase shouldn’t impact PETQ’s upcoming earnings, but the owners of PETQ stock will be interested in hearing how management expects the acquisition to impact the current quarter and when synergies from the deal will be realized.
The Bottom Line on PetIQ Stock
PetIQ stock is the victim of a jittery market and fickle traders. The price target reduction by Raymond James should have raised a few eyebrows, but the decline of the stock has been overdone.
PETQ is well-positioned to continue to grow over the next few years. As pets become more important to U.S. households, their care is likely to be one of the last items people will stop spending money on if the economy turns sour. I expect PetIQ to report positive earnings, enabling PETQ stock to bounce back towards $30 per share.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.