Cash in on cats and dogs
Pets at Home is a cheap way to play a long-term trend in pet ownership
Deprived of human contact by lockdowns and social distancing, a large number of people rushed to acquire a pet during the pandemic. So it was perhaps not surprising that shares in retailer Pets at Home (LSE: PETS) more than doubled from around 230p in mid-March 2020 to just above 500p in September 2021.
However, after restrictions were lifted last summer, there was speculation that this boom would go into reverse. Thus over the past nine months the share price was locked in a downward spiral, falling back to a low of 267p, before a recent surge pushed it back to 340p this week.
So is this a genuine recovery, or do the shares still have further to fall? I believe it is the former. While there has been some scattered evidence of an increase in the number of pets being abandoned by their owners due to rising energy bills and general inflation, as well as a simple lack of time to care for them, this doesn’t seem to be happening as much as people predicted. Recent surveys suggest that levels of pet ownership continued to increase between 2021 and 2022, with a record six in ten households now owning some sort of pet, rising to nearly four out of five in those that contain children.
A long-term trend
In any case, even if there is a temporary dip in pet ownership, the long-term trend is for overall levels to increase. Even more importantly, people are also spending ever-greater amounts of money on caring for each individual pet, including on healthcare. We’ve reported on this in MoneyWeek before, including in my article in July 2021 (issue 1062).
This is good news for Pets at Home, which also makes a large chunk of its revenue from pet care, with services ranging from grooming to the 443 veterinary services that it runs in a joint venture with the individual vets. Overall, with the firm’s preliminary results suggesting that its revenue grew by 15.3% in the year to the end of March, its prospects for growth on the back on strong, longterm demand continue to look very solid.
Solid financials and attractive value
As well as having a strong business model, Pets and Home is performing well in terms of its key financial metrics. For example, it has a return on capital employed of 11.5%, an indication that it is deploying its capital efficiently. It also has a low level of debt and plenty of cash in hand (net cash of £66m excluding lease liabilities). Consequently, the fall in its share price over the past few months looks like an opportunity for those still considering investing in it, as it now looks attractively valued. The shares are trading at only 14.7 times forecast earnings for 2023 and offer a solid dividend yield of 3.6%.
As well as good fundamentals, there are signs that the share price may have turned the corner and regained some momentum, rising by 10% in the past month. This means that is now just below its 50-day moving average. I would suggest that you wait a little longer until it passes 350p, then go long at £8 per 1p. In that case, I’d go with a stoploss of 230p, which would give you a maximum possible downside of £960.
“A record six in ten households now own some kind of pet”