Today’s trading statement from veterinary services provider CVS Group (LSE: CVSG) goes some way to explaining why its share price has been hitting record highs recently. While this may prompt some investors to take profits after a strong run, I would see no reason to back out just yet if I did hold it. In fact, I think the huge increase in UK pet ownership over the last year means there could be even more upside ahead for this growth stock.
“Strong revenue growth“
As one of the biggest vets businesses in the UK, it’s not surprising that business at CVS has boomed the last year or so. Positively, it would seem that this trading momentum has been particularly evident over the last couple of months. “Strong revenue growth” was achieved in May and June, according to the company.
As far as actual numbers were concerned, like-for-like sales growth for the financial year to the end of June came in at 17.4%. This was clearly far better than the meagre 0.7% achieved last year. Then again, like so many other businesses, CVS Group was massively affected by the introduction of Covid-19 restrictions.
The firm now expects to report EBITDA (earnings before interest, tax, depreciation, and amortisation) “marginally ahead” of what analysts were expecting.
But can all this last?
I think this can last. Although we now appear to be coming to the final few chapters of the pandemic, all those new pet dogs, cats, and iguanas will need regular checkups for many years afterward. This demand should provide some support to the CVS share price going forward.
In another sign of just how much the trading environment has improved, CVS said today that it now employs roughly 10% more vets compared to this time last year. It’s also advertising for new positions and planning to continue its acquisition-friendly strategy by snapping up independent practices. That sounds pretty bullish to me!
If all this sounds like I think the shares of CVS can only go way, let me clear: I think there are still risks to investing here.
One I’ve already mentioned is the possibility of profit-taking in the months ahead. ‘Running your winners’ is a rule of thumb that I endorse. However, there will come a time when some long-term holders will want to move on. After all, the shares have climbed 116% over the last year. Anyone buying when this growth stock dipped to a low of 433p back in February 2019 would have a gain of over 400% by now.
At 31 times FY22 earnings, the valuation undoubtedly reflects this. One needs to remember that CVS isn’t the only veterinary services provider out there. So, while there may be more pet owners these days, it’s clear the company can’t rest on its laurels. Client numbers must keep rising.
Ongoing recruitment also has implications for the mid-cap’s bottom line. A shortage of vets and support staff will mean that CVS needs to make its pay and perks more attractive to get the best talent.
Defensive growth stock
So long as I were comfortable with the drawbacks of investing in CVS right now, I’d buy this defensive growth stock today. Regardless of what happens next in the economy, people won’t stop spending cash on their furry (and not so furry) companions. To me, that makes for a compelling investment.
Paul Summers 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.