While growth stocks have been hit the hardest in the recent market correction, they’re also the most likely to benefit from a recovery. But CVS Group (LSE:CVSG) proved to be remarkably resilient to the macroeconomic headwinds, with its share price actually climbing by double digits in the second half of 2022.
Unfortunately, this impressive display came to a screeching halt the following year, with shares dropping 30% in September 2023. Despite what the downward trajectory would suggest, the business appears to be thriving, with the group’s latest results showing a massive 50% jump in pre-tax profits!
What’s going on? And is this one of the best growth stocks to buy now? Let’s take a look.
The power of a monopoly
Throughout the British economy, there are certain sectors dominated by a handful of businesses. And one of those is the pet care industry. As a leading provider of veterinary services, CVS can be easily described as being a near-monopoly.
The firm continues to make acquisitions of small independent practices to expand its network. And these efforts are clearly reflected in the financial results. In the 12 months leading to June 2023, the company bolstered sales by 9.8% to £608.3m. But its bottom line expanded by a whopping 63%, from £25.7m to £41.9m.
It seems the group is successfully capitalising on the rise of pet ownership following the 2020 pandemic. And with demand for pet care largely being unaffected by economic turbulence, this business hasn’t exactly felt the pain from inflation since it can just pass the costs onto customers.
The rising level of debt from continuous acquisitions does provide some cause for concern. However, the balance sheet is far from overleveraged. So why did the stock plummet last year? And why hasn’t it recovered since?
The end of the gravy train?
It seems that investor concerns surrounding CVS Group have less to do with the company and more to do with regulators. The continuous acquisitions of smaller veterinary practices haven’t gone unnoticed. In 2013, around 89% of the market was controlled by independent vets. As of 2021, this number has dropped to 45%, and the downward trend continues with each purchase made by CVS.
As a result, this activity has caught the attention of the Competition and Markets Authority (CMA). The CMA has launched a formal review into the sudden price hikes within the veterinary sector to determine whether companies like CVS are taking advantage of their monopoly-like status.
If this is proven to be the case, regulatory intervention may follow, potentially creating significant problems for this business. It could put an end to the group’s acquisition activities, causing growth to slump. In extreme cases, CVS may end up getting broken up. Either outcome is bad news for shareholders.
Despite this, the CMA continues to approve new acquisition proposals from CVS Group even after the launch of its review. As such, it’s possible investors may have overreacted, creating a potential window of opportunity for those happy to take on some risk.
