Chit Chat Stocks - Fundamental Analysis: Trupanion (TRUP)

Episode Date: May 17, 2020

On this show we talk Trupanion. Brett gave it a rating of 4.5 and Ryan a rating of 4.8. --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome in. This is the Fundamental Analysis Show on Chit Chat Money. My name is Brett Schaefer and I'm here as always with Ryan Henderson and we're talking another small cap stock. First pet stock I think we've ever done. The pet industry. Trupanion. No, this is not the first pet stock. This is Zoetis. Oh, right, right, right. That one. They're very large. So, you know, maybe that's Trupanion's next path or maybe zoidus will acquire them someday but do you want to talk about what true panion is and what their uh the history of the stock and the company yeah true panion says on their 10k i have this in quotes here our mission is to help the pets we all love provide

the best veterinary care basically true panion provides medical insurance for cats and dogs throughout the u.s canada and puerto rico they operate in two business segments so their subscription business which is marketed for consumers and then their other business segment they literally said other business segment um which revenue is generated by writing policies on behalf of third parties the other segment also includes uh companies or organizations who choose to offer pet coverage to their employees i don't think that's a huge market i don't think there's tons of employers that do that but anecdotally no uh but who knows um important to note though true panion is not wellness coverage it's accident and illness

coverage so it doesn't cover your average like if you take your dog into the vet once a year or something doesn't cover that it covers like critical incidents so it's like you know run over by a car or something like that that is where true panion insurance would help you out history though true panion is based in seattle and it was founded by their current ceo daryl Rawlings in 1999. It was originally founded in Canada and was originally known as the vet insurance, which is a very simple name. Maybe go back to that. According to Wikipedia, Trupanion was the first pet insurance company to build technology, enabling clients to avoid reimbursements with the company paying veterinary bills directly. Interesting. It seems like they've

sort of had the same mission this whole time. So it's been around for around 20 years. They IPO'd in july of 2014 yeah i always hesitate with companies that were founded during the tech bubble but you know they've uh i guess they didn't ipo right away and they've stayed around um and ipo'd in 2014 so i guess it's not that big of a deal but i do that does make me cautious when a company is founded in 1999 yeah but yeah i guess maybe they were just i mean it's been around for 20 years and it's not really a dot-com company so i wouldn't i wouldn't i wouldn't look too much into it yeah all right valuation market cap 905 million dollars ticker is t-u-r no t-r-u-p so trump uh price is 28 and 38 cents and that is of recording on may 15th 2020 which is a little

before uh the recording you know when we're going to release this so just make a note uh ev to sales is 2.04 and they are not profitable. Margin adjusted price to sales of 49.55, right around average. And that is coming from decent sales growth, but very low gross margins, which Ryan will get into on the earnings. Shares outstanding have gone from 27 to 34 million since 2015, which isn't bad at all. It looks like they're solid on the stock-based compensation expense. $75 million in working capital is also pretty good, especially for a market cap of $905 million. Net debt is negative $73 million, which is also good for a company, again, with a market cap below a billion dollars.

And the balance sheet looked pretty simple, nothing too concerning. A little bit of long-term debt, a good amount of cash. They're basically break-even on cash flow and net income, so really no liquidity concerns. and they have extremely stable revenues. So yeah, nothing that really out of the ordinary. Yeah, and I'll talk a little bit about the conference call before I get into earnings. On the conference call, they mentioned that revenue has increased.

There has been revenue growth every single quarter for I think it was all of their existence. So they have very stable existing customers. And then also, it doesn't really matter what the market conditions are like. it doesn't matter if there's like ebbs and flows like the 2008 crisis people are still taking care of their pets it uh the ceo mentioned it was sort of like being snowed in if your pet really has a critical emergency you'll trek through the snow to get them to the vet is essentially their their thing when they're comparing it to coronavirus so um yeah so that's kind of the stability of

the business i'll get into the earnings though first quarter 2020 revenue was 111.3 million up 28% year over year. Total enrolled pets, which is basically their customer count, was 687,435. That's up 25% year over year. Subscription revenue made up 80% of the total top line. And for reference, so subscription revenues increased 21% year over year. So growing a little slower than their other segments. But in 2017, so two years ago, subscription revenues made up 90% of the top line. So that other business segments is growing a lot faster. Net loss was 1.1 million for the quarter versus a net loss of 1.3 million from last year. Operating cashflow is 2.9 million for the quarter and free cashflow was 1.4 million. Both of those

are about half of the cashflow numbers from last year. If you're thinking like, wow, this sounds like a low margin business. When you're looking at the cashflow and the net numbers, it is 16% overall gross margins. And even their subscriptions are like 18% at best, I believe. And then the other segments is even lower. So it is a low margin business. Their average revenue per pet ARPP was 50, 96 cents a month up 5% year over year. Can we just, can we stop acting like the pets are the customers yeah the uh they're treating a lot of the numbers and they treat a lot of their metrics like it's a digital business i thought i was reading like spotify's earnings metric i was like these aren't maus these are just animals guys all right let's let's relax a little bit

here so it's like yes the you are insuring the animal but the animal isn't signing up like it It's human customers. You don't know that. I guess not. They have around $27 million in cash and cash equivalents and roughly $76 million in short-term investments. Since 2010, they have a 98.5% average monthly retention rate. So it is sticky, it seems like.

I assume there's sort of like that avid pet group that really wants to make sure that there's nothing wrong with their pets ever, and that is sort of their customer. years. Thank you. all right next up digging trenches which is the moat rating what do you think for trupanion well they've been around for 20 years for a reason so i if veterinary insurance or pet insurance wasn't didn't have an audience they wouldn't still be around so um i guess that gives them

some sort of reason to stick around but i did read on the conference call someone asked about the zoidus or zetus company is transitioning to also doing illness and accident coverage as well they used to do like just wellness coverage but they're also transitioning and moving into that as well so there could be some competitors from a bigger company like zoidus or zetus yeah i'd give them like a two it seems like within their customers with the vets and the pet owners it seems strong high retention rate and it's kind of tough to build that up from the ground level it's sort of like a network effect but then you have to take into account they are under a billion dollars in market cap and revenue you know not that strong compared to someone like zoidus who

can kind of come in and what are they like a 50 billion dollar company they could easily spend a lot to uh catch up with them so yeah i mean it seems strong but i i would not say the moat is something i would be concerned with for this company there's some other concerns i think but moat is not one of them all right further reading what are you looking at okay first one here is what is the addressable market and it's tough you know you're not supposed to typically worry about addressable market you're supposed to worry about the business usually um and sometimes companies can build addressable markets uh where they're not really there before but i'm really concerned looking at this business i know some people spend a lot of money on their pets but

there's like my family there's a cat um and it went to the it's been to the vet like one time in 15 years yeah i mean some people you know and it's been fine like i don't know like a lot of pets um yeah they're i don't know how many people need this uh but maybe there's some numbers that might back that up yeah tam is definitely a viable concern um my further reading i'm looking at the typical vet vet visit costs so how often does a pet have an accident so severe that it costs more than five years worth of a subscription cost yeah it i okay i'm hesitant but they talked about this ratio of lucky to unlucky uh pets and they said we we essentially want the subscriptions from our lucky pets to cover the uh to cover the costs of our unlucky pets i have a hard time

believing that the subscription costs are worth it for most pets so i guess that is probably the hardest sell for customers so i'm curious what the actual vet costs are i don't know i don't pay you the vet costs so um kind of tough for me to say but uh future growth yeah definitely yeah all right future growth opportunity i mean it was really tough for me to come up with one which i think is not a good sign typically although maybe it's because i just researched this this morning but possibly you know horizontally integrating across the entire vet industry not like owning veterinarians or anything like that but using the loyal users and the vets to go from just accidents to overall pet coverage which is a lot larger i would assume um and that just seems like a simple

way you know a lot of strong businesses have done the thing where i guess it's i'm tough coming up with an example here but you know where you start out with a specific niche you really hone in on that and then you spread out from there because you can't just go after the entire market um right away yeah i'm i'm thinking and so i think this is edis or whatever that company is i think they offer like the primary uh insurance in wellness and so it might be a little hard for uh true opinion to compete in that but my future growth opportunity is automating claims in 2019 32.2 percent of the total claims were made through TruePanion's automated software. In 2018, that number was four and a half percent. So massive growth there. And in their shareholder letter,

they said having automated claims provides benefits across the organization. I would assume that has to do with just less overall operational costs. So obviously, if they can automate that process, good for them, much better, much easier, less operational costs. They said they're hoping to get that number to 50% by next year. So just watch out for that number if you're a shareholder. Yeah, they could definitely increase operating margins. I mean, just intuitively, that's what it seems like it would do. All right, last segment is, or second to last segment, highlights and lowlights.

They seem like the leader in their niche space, which is the accidents and illness for pets. They have under a million in total pet count signed onto their plans. And if you're looking at this optimistically, there's almost 184 million household dogs and cats in the U.S. So there's a massive amount of actual pets that could be signed on if pet insurance became something that was like mandatory or common. So massive addressable market, if you think about it like that, and that's the opportunistic outlook at it. There's also some network effects in the industry that would take over at a certain point. So, and the way in which I believe they get most of their customers through the typical wellness checkup.

So you go in for your typical wellness checkup. There's a concern here like, you might want to watch out for this bump on your dog's hip or whatever. Okay. So if this is a big accident, if we have to have surgery to get it to remove something like that, you should have true pannion coverage. So they kind of get it through the typical wellness checkups. So the more that there's interest in insurance as a whole, the more they benefit.

Low lights though is they're incredibly low margin and they're going to become more low margin since this other business segments is starting to take up more of the top line, which is lower margin in and of itself. So not great on the margin side. They're getting some competing offerings as well, but the overall competition or the pressure comes from just outright not paying for it. according to the north american pet health insurance association only around 2.4 million pets are actually insured and that's out of 184 million whatever household dogs and cats

that's a very low amount and so i'm experiencing this right now my dog just got sick my dad took him into the vet and i was like you know how much is it going to cost and he said well probably around three three to five hundred that's like let's say we take him in for one accident and it's like that much that's only a year's worth of subscription costs so yeah yeah and if you look at that 2.4 million um is only about four times troupanian's market right now right so yeah i mean the concern is there the low lights i mean i have the same one not a large market opportunity And my other low light is margins are super low. It doesn't give a lot of room for profitability growth.

Earnings per share growth seems like the biggest concern here. My highlights though, you can definitely see that there is a moat. When someone signs on, they have the high retention rate and then they have that very stable revenue, which, you know, people that do spend money on their pets are going to continue to do that. It's just the question of how many people are going to spend that much. yeah and i just think people more often than not are willing to risk paying this out of pocket yep all right well uh what's your rating for the stock it's gonna be low it's gonna be very low

uh simply because i could see this as a business so it's very stable and if they were trading below what you would identify as intrinsic value or at a low pe ratio when they actually get to scale because they're right around break-even right now. It could be a business that you'd invest in, say, I guess the only time I've ever done this is like Target or something like that. Something like that where you're trying to do a short-term thing, but this is not something I'd want to own for a decade plus. I'm not wanting to pay up for this at all.

So I'd go like four or five. I mean, with the EV sales of two with these margin numbers, it's not great. um and yes it is stable but the growth doesn't seem like it's really i really struggle with the growth continuing for the next decade yeah um i'd agree with that there is some stability in the business their existing customers you also think about the existing customers when they have a pet die or something like that just get i assume they get new pets like these are the avid pet people that are insuring their pets. So I guess that offers a lot of stability for the business.

But overall, is this going to my portfolio? No, not. Maybe it'd be a one-time value play at the right price, just like you said. But I can't remember a time that I've invested in a company for a one-time value play. So this is going to be low for me. I'm going to go 4.8.

Yeah, right around the same. And they're not even in that range where, like i think they'd have to fall like 40 50 for it to hit like you know quote unquote value territory and they it the big concern if you're looking at a different perspective where can they reinvest where they can get high returns on their capital for like the next decade seems very uh low at least to us but maybe there's something we're missing here that's going to do it for this episode though thank you guys for listening email us show suggestions at chit chat money podcast at gmail.com and follow us on Twitter at chitchatmoney. Remember, we are not financial

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