PetIQ: Attractive Acquisition Offer After Strong Earnings Growth In Q2

seekingalpha08-09

Q2 results showed modest revenue growth with substantial improvement in margins, leading to adjusted EBITDA ending up $4 million higher than management’s guidance.I expect full year adjusted EBITDA ...

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I also expected its balance sheet to strengthen through FCF generation expected from the business. I also found the valuation attractive, stating: In my view, this valuation leaves room for further upside for investors given the company's expectation to grow revenues above 10% in the medium term and raise adjusted EBITDA margins closer to 15% from around 11% this year. On the negative side, revenue growth was decelerating partly due to a record high tick and flea season in 2023 and management was planning to significantly increase marketing spend this year. These factors, together with the company's high debt load, led me to assign a Neutral rating on the shares. Key takeaways from the Q2 results Q1 Investor Presentation PetIQ's (NASDAQ:PETQ) Q2 revenue growth continued to decelerate, with a year-over-year increase of 4.6% compared to the 6.2% increase seen in Q1. While revenue of $328.9 million was within management's guidance, adjusted EBITDA came in at $39 million, which was $4 million above the midpoint of guidance, as shown above. The substantial outperformance in margins was due to higher gross margins, which benefited from the sales of the company's own manufactured products, which were up 15.7% versus Q1 2023. As I had anticipated in my previous write-up, FCF was strong at $54.3 million as inventory levels came down from the elevated levels seen in Q1, and this also helped reduce the company's net debt position. My thoughts on the acquisition offer Close to fully valued at $31 per share Along with its Q2 earnings release, the company issued a press release stating that it had entered into an agreement to be acquired by Bansk Group, a company that acquires and manages consumer brands. The acquisition price is $31 per share. In order to understand the underlying valuation implied in the acquisition price, I take into account its total debt, which stood at $443 million and cash of $84 million. This amounts to a net debt position of $359 million, which gives the company an enterprise value of $1.3 billion at a share price of $31 and assumes 30 million shares outstanding. Based on the guidance of $115 million and $50 million for adjusted EBITDA and FCF respectively, that was provided by management during the Q1 earnings release, the acquisition price reflects EV to adjusted EBITDA and Price to FCF multiples of 11.2 and 18.6 respectively. However, based on the outperformance with respect to guidance in Q2, I estimate the company's full-year expectations would have been revised significantly higher. Management will no longer hold earnings calls and provide guidance, but I believe that their latest expectations for adjusted EBITDA would be close to $125 million and $57 million for FCF. Based on these updated expectations, the valuation multiples for EV to adjusted EBITDA and Price to FCF were reduced to 10.3 and 16.3 respectively. Given the company's outlook of modest growth and improving margins, I consider the shares to be close to fully valued at the acquisition price. In comparison, its public market peer Chewy (CHWY) which has similar growth rates, trades at EV to EBITDA and Price to FCF multiples of 18 and 17 respectively. On a relative basis, some investors might argue that there is a potential for modest upside. Low risk of the deal falling through PetIQ's CEO, who is also its Founder, as well as the company's Board have approved the agreement to be acquired by Bansk Group and recommend that shareholders do the same. Insiders currently own close to 9% of the total shares outstanding, and I expect that the majority of the company's shareholders will support this deal. Furthermore, I do not expect this deal to face any regulatory scrutiny, given Bansk Group does not have any brands within the pet health and wellness category. The transaction is likely to be closed as planned in the fourth quarter. Given the large market opportunity for PetIQ and the strong recognition of the brands under its umbrella, there is a possibility, albeit small, of a competing bid for the company. Larger players in the pet industry seeking further consolidation could be potential suitors. Conclusion  The company's strong Q2 performance was primarily driven by higher gross margins resulting from increased sales of its own manufactured products. I anticipate that the full-year adjusted EBITDA and free cash flow will exceed management's earlier guidance, which makes the acquisition valuation multiple slightly lower. The acquisition price seems to nearly fully reflect the business's value, and I expect the transaction to be completed without major obstacles. Nonetheless, there remains a small possibility of a competing bid for the company.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2458590011"}