It took me a long time to find Pets at Home (LSE: PETS) an interesting one FTSE 250 stocks. It is a leader in the UK pet care industry enjoying permanent demand with decent long-term growth.
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 trade update drops today (30 January). Should I invest? Let’s talk about it.
Attractive features
There were things I immediately liked about it. Firstly, the company is the top dog in the pet care space in the UK. Therefore, consumer brand awareness is strong, meaning it doesn’t have to spend a ton of money getting its name out there.
Second, the majority of owners will not stop caring for their pets even if the economy goes to the dogs (sorry). This means that the stock can 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 Pet and Homes sell grooming salons as well. Meanwhile, its Vets4Pets business is the UK’s largest branded veterinary chain.
If it was a pet food business, I would ask if 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 can easily be purchased online, meaning there is a lot of discounting and pricing pressure. But veterinary practices tend to be less susceptible to online competition (most pets are already registered) while dog grooming is done locally. The company has hundreds of these locations.
Q3 trade update
In Q3, covering the 12 weeks to 4 January, group revenue rose 4.3% year-on-year to £362.4m. The veterinary business grew well, with revenue increasing by 13.4%, while trading in its retail operation was “elastic“, increasing by 3.5%.
However, there was weakness in pet accessories, which prompted management to lower its full-year pre-tax profit guidance to around £132m (down from £136m).
Honestly, it doesn’t bother me too much. Pet food sales have taken off and the vet business has struggled so I’m worried about losing market share. But accessories (toys, kennels, coats, etc.) are discretionary, which I think just reflects cost-of-living pressures.
That said, Q3 included the Christmas season where many owners put some treats under the tree for their ‘fur babies’. So there is a risk that this weakness extends into Q4 and beyond, especially if the economy worsens.
However, investors are not panicking. As I write, the stock is down just 2% to 287p.
My move
Fund manager Terry Smith recently made an excellent point: “When I was young, people went to the vet twice. At the time of the animal’s birth and euthanize it at the end of life. Now, they go there more often. This is an inevitable trend that will continue.“
To me, Pets at Home seems well placed to capitalize on this”inevitable trend“. I think accessories will pick up when the disposable income, and Pets at Home can expand even more globally (I suggest ‘Pets Abroad’ for that potential division!).
With the stock trading at an attractive 14 times forecast earnings, I would consider investing with the 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.
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Ben McPoland has no position in any of the aforementioned shares. The Motley Fool UK recommends Pets At Home Group Plc. The 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 set of insights makes us better investors.
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