Last Wednesday (27 November), FTSE 250 stock Pets at Home (LSE: PETS) fell a whopping 17%. This led to a lot of buying from investors, with the stock appearing in Hargreaves Lansdown‘s list of most purchased shares for the week.
Should I follow the crowd and buy the petcare stock for my own portfolio? Let’s discuss.
What caused the crash?
The share price crash last week can be attributed to a rather disappointing set of half-year results.
For H1 (the 28 weeks ended 10 October), group revenue increased just 1.9% to £789.1m. Meanwhile, revenue from its retail division (which accounts for the bulk of total revenue) only grew 0.1% to £696.3m.
Looking ahead, the company said that it was expecting the pet retail market to remain “unusually subdued” for the rest of the financial year. As a result, it only expects “modest” year-on-year growth in underlying profit before tax for FY25.
It’s worth noting that the H1 results weren’t terrible. One highlight was 18.6% revenue growth from the company’s vet division. Another was a 43% jump in free cash flow. Zooming in on earnings per share, they increased 13.5% to 8.4p.
Overall though, investors were unimpressed.
The bull case
Looking at the stock today, I can definitely see reasons to be bullish.
For starters, the valuation is now quite low. For the financial year ending 30 March 2026, the EPS forecast is 22.8p, so we have a forward-looking price-to-earnings (P/E) ratio of just 10.3 at present.
One person who clearly sees value at that earnings multiple is CEO Lyssa McGowan. On 28 November, she snapped up £100k worth of shares at a price of £2.36 per share.
Secondly, the dividend yield now looks tasty. With analysts expecting a payout of 14p per share next financial year, the yield has risen to around 6%.
Additionally, the company is seeing good growth from its vet division as well as its app. And management expects conditions in the UK pet care market to pick up in the medium term.
The bear case
However, there are also a few issues that concern me.
One is rising costs. Next financial year, the company expects costs to rise by about £18m due to increased National Living Wages and National Insurance contributions and this is likely to hit profits.
Another is competition. These days, I tend to buy my dog food from Amazon. I’ve found that it has a better selection than Pets at Home (and better prices).
A third factor to consider is that the Competition and Markets Authority (CMA) is looking into how vet services are bought and sold amid concerns that pet owners may not be getting a good deal. This adds some uncertainty.
Finally, it’s worth highlighting the long-term share price chart. Over the last 10 years, this stock has hardly gone anywhere.
That’s a little worrying, especially when we consider that the global petcare market has exploded over the last decade. To me, it suggests that the company has some flaws.
Should I buy?
Weighing everything up, I’m going to pass on Pets at Home shares for now.
There’s certainly a chance that they could turn out to be a decent investment, however for me, the company does not have enough of a competitive advantage.
