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Pets are much-loved but expensive to look after, I am often told. And pet ownership is growing in popularity. So FTSE 250 firm Pets at Home (LSE: PETS) could seem like an obvious way to try and benefit from that long-term trend as an investor.
But things are not always so simple in the stock market. Just because an area of business activity seems promising does not necessarily mean that all the companies operating in it will do well.
Pets at Home has seen its share price tumble 26% over the past year. It is now 56% off its 2021 high, back when locked down Labrador lovers were lavishing their companions with care.
That means the FTSE 250 firm now trades on a price-to-earnings ratio of 12, which does not sound very high. It also offers a 5.8% dividend yield, well above the 3.3% average for the FTSE 250.
So could this be a share to consider?
Strong brand, ongoing growth opportunities
Let’s start with the basics of the business. The market is large and seems lucrative. Last year, Pets at Home had a profit margin before tax of 8%. That was an improvement from the prior year and is pretty decent, in my opinion.
Revenue was basically flat, but at £1.5bn it was substantial enough to benefit from economies of scale. The retailer has over 8m members in its Pets Club.
With a strong brand and large base of customers that keep coming back, I reckon Pets at Home has the makings of an attractive business.
A fall in revenues on the retail side of the business did concern me. This could demonstrate the ongoing risks of growing digital competition. But it was made up for by strong revenue growth in the firm’s vet business. It is an area I reckon could help fuel long-term growth.
I also see the vet business as having more pricing power than the retail business, as there is typically less price transparency and more urgency when buying vet services than a pack of cat food, for example.
Total indebtedness of £342m should be comfortably manageable for the firm with its £1bn market capitalisation, I reckon.
What’s going on?
There seems to be quite a lot to like about this FTSE 250 share, so why has it lost over a quarter of its value in just 12 months?
In its most recent trading statement, the business pointed to a “subdued market backdrop with no growth in the pet retail market”. Retail sales continued to fall year on year in the most recent quarter, with vet service revenues growing.
In the current economic climate, I see a risk that pet owners are cutting back on spending for their pets. Perhaps by switching to less costly alternatives for some products.
But the basic needs will still be unchanged and I believe many pet owners will pay for vet services even in a weak economy. So I remain confident about the outlook as a long-term investor.
I reckon the FTSE 250 share is attractively priced, potentially a long-term bargain and I see it as one for investors to consider.
