I’ve long found Pet at Home (LSE: PETS) an interesting FTSE 250 stock. It’s a leader in a UK petcare industry that enjoys permanent demand with decent long-term growth prospects.
Last year, an estimated 53% of UK adults owned a pet, up from 51% in 2020. And they spent £5.3bn on veterinary and other pet-related services in 2022, according to the Office for National Statistics.
Pets at Home’s latest trading update dropped today (30 January). Should I invest? Let’s discuss.
Attractive qualities
There are some things I immediately like here. First, the company is the top dog in the UK’s pet care space. Therefore, consumer brand awareness is strong, meaning it doesn’t need to spend a tonne of money getting its name out there.
Second, the majority of owners won’t stop looking after their pets even if the economy goes to the dogs (sorry). This means the stock could provide decent defensive qualities to my portfolio during a potential recession.
Third, I like the company’s diversification. It sells food and accessories, but many Pets at Home stores house grooming salons too. Meanwhile, its Vets4Pets business is the UK’s largest branded veterinary chain.
If this were just a pet food business then I’d question whether it had what Warren Buffett calls an economic moat. That is, a competitive advantage that helps a company withstand rivals and maintain profits.
After all, pet food is easily bought online, meaning there’s lots of discounting and pricing pressure. But veterinary practices are arguably less susceptible to online competition (most pets are already pre-registered) while dog grooming is carried out locally. The company has hundreds of these locations.
Q3 trading update
In Q3, which covered the 12 weeks to 4 January, group revenue increased 4.3% year on year to £362.4m. The vet business grew nicely, with revenue increasing 13.4%, while trading in its retail operation was “resilient“, ticking up 3.5%.
However, there was weakness in pet accessories, which promoted management to lower its full-year pre-tax profit guidance to around £132m (down from £136m).
To be honest, I don’t find this overly concerning. Had pet food sales and the vet business struggled then I’d be worried about market share loss. But accessories (toys, kennels, coats, etc.) are discretionary, which I reckon simply reflects cost-of-living pressures.
That said, Q3 included the Christmas period when many owners put a couple of treats under the tree for their ‘fur babies’. So there’s a risk that this weakness extends into Q4 and beyond, especially if the economy worsens.
Investors aren’t panicking, though. As I write, the stock is only down 2% to 287p.
My move
Fund manager Terry Smith recently made an excellent point: “When I was a child, people went to the veterinarian twice. At the time of the animal’s birth and to euthanize it at the end of life. Today, they go there more often. This is an inevitable trend that will continue.“
To me, Pets at Home seems well-placed to capitalise on this “inevitable trend“. I think accessories will pick up when disposable income does, and Pets at Home may yet expand internationally (I’m suggesting ‘Pets Abroad’ for that potential division!).
With the stock trading at an attractive 14 times forecast earnings, I’d consider investing with spare cash.
The post Is Pets at Home a FTSE 250 stock worth buying after its Q3 update? appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Pets At Home Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
