Description

TRUP has been written up in 2015 and 2017.  Please refer to their write-up (both the long and short cases) for a history of the company, an in-depth review of the business model, TAM, and risks to consider.  I will focus on recent performance, highlight the more salient points, and discuss some near-term catalysts below.

TRUP provides medical insurance for cats and dogs throughout North America. Their data-driven, vertically-integrated approach enables them to provide pet owners with the highest value medical insurance for their pets, priced specifically for each pet’s unique characteristics. TRUP has a highly predictable and recurring subscription revenue with a focus on maximizing the LTV of each pet while sustaining a favorable ratio of LTV relative to PAC, based on management’s target return on investment of +30%.  The company is a dominant market player with a significant cost advantage and has been growing at a 30% CAGR since 2011 while reinvesting profit/cash back into the business. With only 3% of pet owners in the US having pet insurance, TRUP has a long runway for growth. We expect the company to grow ~20% CAGR over the 5 years. Given the attractive returns on incremental investments, we support the management strategy (long-term growth over nearer-term profitability) of reinvesting all its profits back into the business.

 Business Model:  TRUP has a cost-plus business model which over time should reflect the increased cost of veterinarian care. Recent post-COVID misestimation of cost inflation is a temporary problem that should eventually be behind us as the company continues to pass price increases. This was not an ideal outcome and it was costly to the company – not only in current-year profits but also in the company’s ability to invest in growth. The price increase has already started to be passed through (including NY & CA) - we expect 2024 to start looking more like the pre-COVID inflation margins. 

Attractive Economics:

• TRUP generates attractive IRR on its investment in growing subs. 
• Management targets 30% IRR – below is an example of what the returns profile should look like with 2022 ARPU and profit estimates.
  • Even if the company is wrong in some of its assumptions the returns should likely still be attractive enough (e.g., 15% - 33% IRR)

• With the exception of 2022’s unusually high inflationary environment, profit per pet had modestly grown over the past few years.  Going forward, there should be some benefit of leverage on its fixed cost, which should support continued modest growth in profits per pet.  PAC will likely increase in future years as well but some level of increase in profit per pet should enable management to be able to continue to identify and underwrite attractive IRR pets. 

Long Runway for Growth / Reasonable Valuation: 

• TAM and runway for growth have been extensively discussed in prior write-ups. 
• As TRUP passes through the recently approved (CA & NY) price increases and continues to execute its growth strategy, we expect profitability to improve.
• With more discretionary profit dollars, TRUP can accelerate future growth with attractive IRRs
• TRUP will likely spend every discretionary profit back into future growth.  We don't expect to see GAAP or reported profits grow for a while.
• Over the next 2-3 years, TRUP should scale to ~$1.5B of revenue.  Likely be much larger over the next 5-10 years.
• Management 2025 Target is:
  • Revenue of $1.5B
  • Intrinsic value growth of ~25%
• We think growing to ~$1.5B of revenue is very achievable while also being disciplined across the IRR requirement of new pets.  
• Longer term, over the next 5-10 years, we think TRUP can grow much larger.  

• Valuation:
• Currently trading ~1x Revenue and ~10x discretionary profit.
• We view this as a very reasonable valuation for a business that should be able to grow +20% for several years, generate attractive (~30% IRR) on capital invested, and strengthen its competitive advantage.
• This valuation becomes even more compelling as the business scales and is able to internally fund its future growth investment needs

Catalyst

• CA and NY price increase pass-through to improve profitability and margins
• Continued +20% growth Subs / Revenue growth
• Evidence that large price increases did not excessively increase churn