Why did the Pets at Home share price crash 10% Tuesday, despite growing sales?

Pets at Home shares are rocketing in 2020, but they took a bit of a dip on Tuesday. What’s happened, and what would I do now?

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Companies don’t often post a sharp rise in sales and see their share prices slump. But that’s exactly what happened to Pets At Home (LSE: PETS) Tuesday. Speaking to the BBC’s Today programme, chief executive Peter Pritchard described the pets market as incredibly strong. He added that pets have played an important part in helping people through lockdown. Yet the Pets at Home share price crashed 10% in morning trading.

Pritchard said: “The last six months of trading have been like no other during my 10 years in the business.” I can certainly understand that.

Many business have been severely hampered by lockdowns. But Pets at Home continued trading as an essential business, through its supply of pet products and healthcare services. And that helped the company to an impressive first half. Total revenue rose by 5.1%, with like-for-like revenue up 5.3%. That was weighted heavily towards the second quarter, with Q2 like-for-like revenue up 12.7%. And, like many in 2020, online sales helped push what the firm calls omnichannel revenue up 65.8%.

Sales up, profits flat

So why did Pets at Home shares fall? It seems the healthy growth in revenue isn’t feeding through to the bottom line. At least not yet. The company recorded a fall in underlying pre-tax profit of 5.1%. To offset that overall figure though, the second quarter saw a 43.7% rise. The first half was, even for an essential business, a very tough one as the pandemic spread. What might the full year look like? Pets at Home says of its outlook: “We now anticipate full-year underlying pre-tax profit to be in line with the prior year.”

I think that’s pretty good. But I suspect it’s not what shareholders had hoped for. Not when the FTSE 250 firm’s shares have been trouncing the index. And not after September’s trading update had sent Pets at Home shares soaring 28% in just one day. But, even if Tuesday’s share price dip might look disappointing on the face of it, 2020’s bigger picture is anything but. The Pets at Home share price is still up a whopping 40% year-to-date.

Pets at Home shares soaring

I see this kind of think happen all the time. Investors see a stock doing extraordinarily well and, understandably, would like a piece of it. But that can lead to over-optimism on snippets of good news. And, conversely, if the company posts results that don’t exceed expectations, we see a sell-off. Still, the effect appears modest for Pets at Home. And I suspect anyone who’s held the shares all year will still be happy with their success.

What would I do now? I think Pets at Home is a fundamentally good company. For one thing, it has modest net debt of £50.9m. That’s only around 0.4x EBIDTA, which is nicely healthy. And it has plenty of undrawn lending facilities. But there’s a combination of two things that keep me from buying.

One is an erratic earnings history, with earnings per share this year expected to be lower than in 2017. The other is the valuation of Pets at Home shares. We’re looking at a forward P/E of around 30. I’m just not sufficiently confident in the company’s growth prospects to pay for that kind of valuation. I’ll keep my eye open for dips, mind.

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.

Alan Oscroft 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.

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