PetIQ (PETQ $14-16) is a small (~$350M sales) growth company doing an $85M IPO with Jefferies and William Blair as lead underwriters. The deal looks solid given that the company is gaining share in the large and growing market of pet medications, health and wellness products and flea and tick treatments. For the whole story see the PETQ IPO slidedeck.

Pet owners know there's a bit of a racket when it comes to getting special foods, medications and wellness products for your dog or cat. In most cases, they have to be purchased from the vet at very high prices. It's good to support your local vet but not being able to shop around for better prices and more convenient delivery doesn't sit well with consumers.

Because the channel is so controlled there are few good generic choices. For example, flea and tick "brands" like Frontline and Advantix are expensive and rarely discounted. There's really no reason that generic versions of these products can't be offered at much lower prices.

Here are some highlights from our annotated PetIQ roadshow transcript:

1. The $8.4 billion in the veterinarian market is made up of between $5.6 billion of pet prescriptions, $1.8 billion of flea and tick products, and $1 billion of other health and wellness items
2. PetIQ started as a pure distributor providing access to branded products. Then launched their own branded generic versions of many products - now these make up 40% of sales.
3. There are a few barriers to entry in this business including FDA and EPA certification and pharmacy compliance. Having the complete array of pet products is also important for retailers like Walmart and Costco.
4. Potential new legislation giving consumers the right to get a copy of pet prescriptions would be a boost for the business. Seems likely to happen.
5. June quarter revenues are estimated to be $85-87M (up 40% YoY) with net income of $5.6-6.0M.

There are a few fleas that investors should consider:

1. The CEO (Christensen) has a checkered past that includes a personal bankruptcy and has been mixed up with some fraudulent activity. It's not clear that he did anything illegal himself.
2. The CFO (Newland) and President (Adcock) both have limited experience in their roles. Newland had some "financial roles" at Albertsons and Adcock was the CEO of Nicklaus Golf Centers.
3. They rely on a pharmacy distribution company called Anda to deliver product to pharmacies.
4. A substantial portion of the IPO proceeds will be used to repay debt so it won't be available as growth capital.
5. There will be remaining "LLC interests" that can convert their holdings to common shares - this could create some excess share overhang post-IPO.
6. Revenue growth isn't smooth and gross margins are fairly low (20%).
7. There is some customer concentration with Walmart and Sams Club accounting for 28% and 19% or sales respectively.

Valuation and Conclusion

Given our balanced view on PetIQ fundamentals, the proposed price looks attractive. We tried to be conservative by using a 15x P/E multiple. Our QuickIV (below) doesn't take into account a few things but it suggests that the shares could be worth $30 if investors overlook the fleas and focus on fundamentals.

As the company reports more quarters as a public company we expect analysts and investors to want management to "peel the onion" on growth. For example, the growth coming from new outlets versus "same store sales" and new versus existing products will be very helpful in measuring and understanding company execution going forward.

Post-IPO we will put together a sector update on the pet space. There have been a number of public deals in the past few years and activity in the private markets is high but fairly fragmented.