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. So 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.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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 from July 2021).
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 stop-loss of 230p, which would give you a maximum possible downside of £960.
For more on this topic, see:
Rize Pet Care ETF: a new fund to profit from pampered pets
How to profit from pampered pets beyond the pandemic
-
Why Trustpilot is a stock to watch for e-commerce exposureTrustpilot has built a defensible position in one of the most critical areas of the internet: the infrastructure of trust, says Jamie Ward
-
Tetragon Financial: An investment trust with stellar returnsTetragon Financial has performed very well, but it won't appeal to most investors – there are clear reasons for the huge discount, says Rupert Hargreaves
-
Why Trustpilot is a stock to watch for exposure to the e-commerce market
Trustpilot has built a defensible position in one of the most critical areas of the internet: the infrastructure of trust, says Jamie Ward
-
Tetragon Financial: An exotic investment trust producing stellar returns
Tetragon Financial has performed very well, but it won't appeal to most investors – there are clear reasons for the huge discount, says Rupert Hargreaves
-
How to capitalise on the pessimism around Britain's stock marketOpinion There was little in the Budget to prop up Britain's stock market, but opportunities are hiding in plain sight. Investors should take advantage while they can
-
London claims victory in the Brexit warsOpinion JPMorgan Chase's decision to build a new headquarters in London is a huge vote of confidence and a sign that the City will remain Europe's key financial hub
-
The consequences of the Autumn Budget – and what it means for the UK economyOpinion A directionless and floundering government has ducked the hard choices at the Autumn Budget, says Simon Wilson
-
Reinventing the high street – how to invest in the retailers driving the changeThe high street brands that can make shopping and leisure an enjoyable experience will thrive, says Maryam Cockar
-
8 of the best houses for sale with electric vehicle chargingThe best houses for sale with electric vehicle charging – from a converted World War II control tower in Scotland, to a Victorian country house in Cumbria
-
Big Short investor Michael Burry closes hedge fund Scion CapitalProfile Michael Burry rightly bet against the US mortgage market before the 2008 crisis. Now he is worried about the AI boom
