It’s in the doghouse now, but this FTSE 250 company could be due a recovery

Plenty of FTSE 250 companies were hit hard by uncertainty over the last few years. But I think I’ve found one that might have potential for a recovery.

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In a world where furry friends are increasingly seen as family members, Pets at Home (LSE: PETS) has positioned itself as a one-stop shop for pet parents. But it caught my eye recently as a FTSE 250 company that may be due a decent rebound if management can execute its plan over the next few years. Let’s dig in and find out more.

A disappointing few years

Pets at Home has had a rough 2024 so far, with the share price tumbling 21.1% over the past 12 months, significantly underperforming the broader UK market. Earnings have disappointed in recent years, with investors struggling to find reasons for optimism.

Despite the recent share price decline, I suspect there are several reasons to be optimistic about the future. The shares are currently trading at 40.4% below a discounted cash flow (DCF) estimate of fair value, suggesting there could be substantial potential. This undervaluation becomes even more intriguing when we consider that analysts forecast earnings will grow by 13.15% per year. I love finding companies that have seen a major decline, but are doing all the right things to recover. Of course it’s too early to make that judgement here, but I like what I see.

Income-focused investors will also find something to wag their tails about. The company offers a current dividend yield of 4.31% and has a track record of reliable payouts. For investors looking for some long-term passive income, this could be a welcome addition to many portfolios.

Risks

However, every investment comes with its share of risks, and Pets at Home is no exception. There has been significant insider selling over the past three months, which could be a red flag for some investors.

Additionally, the pet care market is becoming increasingly competitive, with online retailers and supermarkets muscling in on the company’s territory. As economic headwinds put pressure on discretionary spending, some pet owners may cut back on premium products and services, potentially impacting the company’s bottom line.

Diversifying

Despite these challenges, Pets at Home’s business model offers several avenues for growth. The company has successfully integrated its bricks-and-mortar stores with its online presence, catering to changing consumer habits. This approach positions them well to compete in an increasingly digital marketplace.

Beyond retail, Pets at Home has diversified its revenue streams by offering grooming services, veterinary care, and pet insurance. This multi-faceted approach not only provides multiple income sources but also helps to create a more comprehensive and sticky customer experience.

The company’s VIP club, boasting millions of members, is another key strength. This loyalty program fosters customer retention and recurring revenue, providing a solid foundation for future growth.

One for the watchlist

While the firm has faced some recent challenges, but I feel its current valuation, growth prospects, and dividend yield make it an intriguing option for long-term investors. The company’s strong market position in a growing industry, coupled with its diversified business model, could help it weather short-term storms and emerge stronger.

So while Pets at Home may have been in the doghouse with FTSE 250 investors recently, I think there are signs that the last few years have been an overreaction, and that there might be some growth around the corner for patient investors. I’ll be adding it to my watchlist accordingly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Pets At Home Group Plc. 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 range of insights makes us better investors.

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