Like many stocks in recent months, Pets at Home (LSE:PETS) shares have pulled back. At current levels, is the Pets at Home share price a bargain or could it be a value trap?
Pets at Home share price falls sharply in 2022
As a quick reminder, Pets at Home is a leading pet care business. It currently has over 450 locations in the UK as well as an online presence. Pet owners are able to buy everything they need to look after their beloved pets, including food, toys, bedding, as well as grooming and veterinary services.
So what’s happening with Pets shares currently? Well, as I write, they’re trading for 323p. At this time last year, the stock was trading for 488p, which is a 33% drop over a 12-month period. The share price has fallen sharply since the beginning of 2022, which is when macroeconomic headwinds and geopolitical issues affected stock markets worldwide.
Risks to note
The biggest risk Pets at Home faces currently is soaring inflation, the rising cost of materials, as well as global supply chain issues. The rising cost of materials has an impact on its costs, which could squeeze profit margins. This then has an impact on performance, returns, and investor sentiment. Supply chain issues could also lead to operational problems and impact sales too. I do view this is a shorter-term risk, however.
Despite Pets at Home’s well-established brand and dominant market position, increasing competition in the pet care sector is a threat to its investment viability. Other firms are trying to gain market share, which could impact longer-term performance and returns.
Positives and what I would do now
So to the positives. One major factor for me is Pets at Home’s dominant market position, as well as its presence throughout the UK. With many store locations, its online offering, and being one of the top pet care businesses, I believe this position should boost growth, performance, and returns too.
So what about performance? I do understand that past performance is not a guarantee of the future. However, looking back, I can see Pets has a great track record. In fact, in the past four fiscal years, it has grown revenue and profit year on year.
Next, the Pets at Home share price looks decent value for money right now on a price-to-earnings ratio of just 11. As a bonus, the shares would also boost my passive income stream through dividend payments. Its current dividend yield stands at 3.7%. It is worth noting that the FTSE 250 average is just under 2%. I am aware that dividends are never guaranteed and can be cancelled at the discretion of the business, however.
Overall, I believe Pets at Home shares could be a good addition to my holdings. For that reason I would buy the shares and hold on to them for the long term. The fact the pet ownership levels have increased in recent years is a positive for Pets at Home too. Currently, 59% of households in the UK own pets. This means they will need pet care and Pets at Home could benefit from this.
