Pets at Home (LSE: PETS), which released its annual results today, is in a period of transition. New chief executive Peter Pritchard said that “year one of our three-year strategy has delivered.” He also said the company has “a bright future.”
However, shares of the FTSE 250 group are trading 7% down at 147p. Is the market right to be wary or is this a good opportunity to buy a stake in the pet shops, grooming and vets business?
Doesn’t tickle my tummy
I last looked at Pets at Q3 time in January. I expected it to post a 12% fall in earnings per share (EPS) to 13.5p for the full-year and maintain its dividend at 7.5p. The share price was 195p, so the price-to-earnings (P/E) ratio was 14.4 and the dividend yield was 3.8%. I thought the ungenerous earnings multiple and ordinary yield looked poor value.
Today, we learned that Pets hit the 13.5p EPS number and also maintained the dividend at 7.5p. At the current share price, the P/E is down to 10.9 and the dividend yield is up to 5.1%, making the valuation significantly more generous than it was in January. However, I view this as still too pricey for a company where management is targeting low-single-digit earnings growth and where I see downside risk in a competitive market.
With the rollout of new stores, grooming salons and vet practices slowing and the board also indicating that there’ll again be no increase in the dividend, this is a stock I would be inclined to sell in favour of stronger growth-and-income candidates.
Lack of cash generation
While Pets’ problem is that it is essentially a business where I don’t see sufficient value for the growth on offer, Telit Communications (LSE: TCM) is a company riddled with issues.
In the spring of 2017, this “global enabler of the Internet of Things” was something of a darling with growth investors. However, in a detailed dissection of its cash flows, I showed how its impressive paper profits had been achieved by a dramatic escalation of capitalised development costs, and that the business generated little, if any, free cash flow.
Cats out of the bag
In August last year, founder and chief executive Oozi Cats was exposed as Uzi Katz, a long-time fugitive from fraud charges in the US. He was replaced by finance director Yosi Fait, who had sold all his shares in the company two days before a debt covenant breach on 30 June. The breach remained undisclosed until Telit’s interim results on 7 August.
Investors who had bought shares at 340p in a £39m placing in May might be wondering about the company’s financial position at that time, given that the covenant breach was just a few weeks later. As might the Financial Conduct Authority, which in March this year “commenced an investigation into Telit with regard to the timeliness of announcing certain matters including the interim results published on 7 August 2017.”
The company reported a $52m loss for 2017 and net debt of $30m at year-end. The profit and loss account took an $8m hit from an impairment of previous capitalised development costs but the company capitalised a further $31m for the year. At a current share price of 149p, Telit is valued at £194m and I continue to rate this AIM-listed stock a ‘sell’.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.