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Should you make room for Pets At Home Group plc after today’s update?

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I must say that I’m rather bemused by the market’s response to the latest update from retailer Pets At Home (LSE: PETS), with shares in the mid-cap sinking over 8% in early trading. Let’s take a look at why this happened and question whether it offers an opportunity for prospective investors.

Overreaction?

Today’s Q3 results from the Wilmslow-based business (taking into account trading between 14 October and 5 January) really aren’t that bad and — in my opinion — certainly don’t warrant such a reaction. Although sales from the Merchandise business were flat (at £177.4m), group revenue still rose 4.4% (0.1% on a like-for-like basis) to £203.7m. Much of this can be attributed to the excellent growth in service revenue. This rocketed 47.8% (7% on a like-for-like basis) to £26.3m over the reporting period, thanks to a 26.2% rise (to £9.5m) in fee income from the company’s vet services as well as a contribution from specialist referral centres. 

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In addition to emphasising that these services were a “platform for continuing strong growth“, CEO Ian Kellett also reflected on the encouraging performance of the company’s online offering during the period and a positive reaction to its Christmas range. Importantly, the company stressed that its FY17 profit outlook “remains in line with market expectations“.

All this leads to me think that shares in Pets At Home have been oversold this morning. After all, if you’re looking for defensive companies likely to continue bringing in the cash regardless of how the UK exits the EU or Donald Trump behaves, look no further than those operating in this fast-growing, cash-generative market.

While shares in Pets At Home are unlikely to rocket any time soon — they started 2017 at a very similar price to where they were in January 2016 — I think the company’s plans to continue opening new superstores, vet practices and grooming salons makes sense. Assuming it can sustain the positive momentum achieved in its service and online divisions, a price-to-earnings ratio (P/E) of 15 feels about right. Should the shares fall further, Pets At Home could start to look like a bargain from a long-term perspective. 

Growth star

If you don’t mind paying a bit more, I think Dechra Pharmaceuticals (LSE: DPH), the provider of veterinary products, is another share worthy of further investigation. In a hugely positive period for holders, shares in the Northwich-based company have shot up 45% since this time last year. Although some of this year’s estimated 176% EPS growth will already be priced-in, demand for the company’s products will surely only get stronger given the UK’s love of furry companions, meaning that there could be further upside ahead. As many investors come to realise, just because a share has risen strongly isn’t to say that it can’t continue doing so.

Any drawbacks? Well, it won’t come as a surprise to learn that shares in Dechra don’t come cheap. With price-to-earnings ratios of 25 for 2017 and 21 for 2018, the stock is unlikely to appeal to those dedicated to finding value on the stock market. Although the company can boast many years of strong dividend growth — often an indicator of a company in rude health — the 1.4% yield for 2017 is also relatively small and won’t be of interest to those keen on generating income from their investments. By comparison, shares in Pets At Home come with a far-more-satisfying 3.4% yield, easily covered by earnings.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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