This 4.5% yielding FTSE 250 company could be 50% undervalued. Here’s why I own it

I bought Pets at Home (LSE:PETS) in November. I haven’t made any profit from my investment in the FTSE 250 company yet. However, that doesn’t worry me. In fact, I think it means it’s still a good time for me to buy more. After all, the shares are 45% below their high.

UK’s biggest pet business

I personally think Pets at Home is the best pet company in the UK. I’ve shopped at its stores in London multiple times, and I bought countless pets from it in childhood. It’s been a while since I’ve had to visit, but my fond memories have definitely informed my financial analysis of the company today.

Here are some key stats sourced from the company’s official investor relations department. It gives a snapshot of how successful the business is operationally at this time:

Revenue: £1.4bn
Market share: 24%
Underlying profit before tax (PBT): £136.4m
VIP loyalty members: 7.7m
Free cash flow: £98.2m
Pet care centres: 457 locations

I’m sold on the financials

To get some perspective on how good a business the company is, I wanted to compare it to its two main competitors in the country. Unfortunately, neither Jollyes nor Pets Corner are publically listed, which makes them difficult to chart.

However, across the UK, Jollyes has 70 stores and £115.5m in revenue, and Pets Corner has 150 stores and £83.7m in revenue. So, Pets at Home is significantly bigger and quite clearly dominant.

The good news is Pets at Home is still growing despite being so large. Over the last three years, its revenues have grown by 10.7% per year on average.

Also, it looks really cheap to me with its price-to-earnings ratio of just 12. I also did a discounted cash flow analysis on the company.

By projecting forward the earnings it had over the last 10 years for the next decade, it looks 50% undervalued. If it achieves just half the earnings growth it had over the last decade for the next 10 years, it’s still 12% undervalued based on my calculation.

There are risks

I’m definitely a Pets at Home fan and a happy owner of its shares, but good investing is always about balance. So, I’ve noted some weaknesses which prevent me from investing in it too heavily.

The company only has 14% of its debts covered by cash at the moment, which isn’t nearly enough in my opinion. This isn’t too concerning because its balance sheet is generally okay. However, it means it’s not the most financially flexible business it could be.

Also, it’s paying out 63% of its earnings in dividends at the moment. On the one hand, I like that. But on the other, it means the company isn’t investing as much as it could back into growing the business.

Dividend bonus

Pets at Home has a nice dividend yield of 4.5% at the moment. That’s great. Once I consider the shares have grown in price at the equivalent of 15.9% per year over the past decade, I think this is one of the best UK companies for me to own.

I’m already a shareholder, but I’m going to buy even more of the business soon.

The post This 4.5% yielding FTSE 250 company could be 50% undervalued. Here’s why I own it appeared first on The Motley Fool UK.

setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()

More reading

Is Pets at Home a FTSE 250 stock worth buying after its Q3 update?

Oliver Rodzianko has positions in Pets At Home Group Plc. 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.