However, 2022 has seen Tesco shares struggle. And the stock is currently down 5% year to date. Despite this, I think at the current price, Tesco shares could be a great addition to my portfolio. Let’s see why.

Appealing fundamentals

One of the most appealing factors for me is the firm’s strong fundamentals.

In its Q3 and Christmas trading statement released earlier this year, Tesco said overall sales grew 2.6% year on year. And this was 8.2% on a two-year comparison. This growth was in part fuelled by Tesco’s ability to double its online delivery capacity during the pandemic. And as a result, the business said it had the highest total market share in four years. As a potential investor, these are pleasing results to see.

I also think Tesco is considerably undervalued, especially when compared to its competitors. It currently trades at a price-to-earnings (P/E) ratio of a mere 3.3. For context, one of its main rivals, Sainsbury’s, trades at a P/E of 20.6. This is an attractive factor for me. 

What I also like about Tesco is the stability it can provide during volatile periods. The business is not immune to the side effects of issues such as inflation. However, as my fellow Fool Rupert Hargreaves stated, as long as there is a human need to drink and eat, Tesco’s services will be in demand. This places the firm in a strong position.

Additionally, it has market power to negotiate prices with suppliers, meaning it can keep prices low — in turn drawing in more customers. And when these ideas are added together, it shows just how tempting a proposition Tesco shares are. In fact, supermarkets in general are much in demand at present and last year, rival Morrisons was taken over by a US private equity firm for £7bn. 

Tesco shares concerns

Yet I do have a few concerns as this is a competitive sector. And cheaper, more affordable stores such as Aldi have been on the rise lately. There is always the threat these businesses steal market share from Tesco. IGD expects the discount grocery market to be worth £34.4bn by 2026. And this growth will be fuelled by the increasing cost of living.

A shortage of workers has also forced Tesco to raise its wages, in turn increasing its labour costs. This will squeeze its margins.

Why I’m buying

Regardless of these potential issues, I am still bullish on Tesco. Its strong results even during the pandemic show the retailer’s resilience. With its low P/E ratio, I also think the stock presents real value. Couple that with the potential stability it can provide during turbulent times and I think Tesco shares would be a great addition to my portfolio. As such, I would buy today.

The post Here’s why I’d buy Tesco shares now! appeared first on The Motley Fool UK.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and Tesco. 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.

The J Sainsbury (LSE: SBRY) share price is firmly in negative territory today. That’s despite the FTSE 100 constituent reporting that it had gained market share over the last six months and was in a solid position as the festive season approaches.

With the stock having come back down to earth following a flurry of takeover talk, is now a perfect time for me to buy?

Higher sales

Grocery sales rose 0.8% in the 28 weeks to 18 September compared to the same period last year. Perhaps more tellingly, sales were 9.1% higher relative to two years ago when few of us had ever uttered the word ‘coronavirus’. 

Sainsbury also said that it had made ground on competitors as a result of offering better value, new products and improved customer service. It had also seen “significantly lower” costs over the period. 

It wasn’t all rosy. Sales of General Merchandise fell by 5.8% compared to last year. That’s not necessarily surprising given the huge boost the company experienced as a result of multiple UK lockdowns in 2020. Again, the comparison with sales two years ago is probably a better gauge of performance. On this measure, sales were up 1.1%.  

So, why is the Sainsbury share price down? 

Looking ahead, CEO Simon Roberts warned that supermarkets face “labour and supply chain challenges“. Notwithstanding this, he went on to say that the company’s scale, operations and relationships with suppliers should allow it deliver “the best possible Christmas” for its shoppers. The market, it would seem, is less optimistic.

Investors may also have been spooked on expectations that customer behaviour will continue to “normalise” and growth in grocery sales “moderate“. This is hardly revelatory. Nonetheless, it arguably implies that SBRY is not the investment opportunity it once was. 

Despite this, no changes were made to guidance. Having hit £371m over the first six months, underlying pre-tax profit is still expected to be at least £660m for the full year. 

Takeover talk

Sainsbury stock was priced at 13 times earnings before the market opened. Valuation-wise, this puts it on par with rival Tesco. In terms of recent share price performance, however, there’s no contest. The Sainsbury share price is up almost 34% over the last year. Tesco has gained just 2%. 

Does this make SBRY a screaming buy? I’m not so sure. Sainsbury’s superior gains can probably be attributed to rumours that it’s now a bid target following the acquisition of Morrisons by private equity. 

Clearly, the share price could soar again if these rumours resurface. That said, I would never buy a stock solely on this possibility. As a long-term Fool, it’s the underlying business that matters to me. And with suggestions that Christmas sales at (Sainsbury-owned) Argos are likely to be held back by limited product availability, I can’t see the next few months being easy.

It seems I’m not alone. The stock continues to attract significant interest from shorters.

Better buy

I’ve long considered Sainsbury to be a value trap. Recent performance flies in the face of this. In an industry where clout matters, however, I still think the best option is Tesco. It has almost double SBRY’s market share, offers a similar dividend yield, has lower debt relative to its size and slightly better margins.

This all gives it an edge when it comes to selecting FTSE 100 stocks for my own portfolio.

The post The J Sainsbury share price falls despite rising sales. Should I buy now? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. 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.

Today, I’m taking a fresh look at the company and asking whether this weakness could represent an opportunity in advance of next week’s Q3 numbers (due 20 October).

Deliveroo share price: time to hop on board?

Based on its most recent set of numbers, Deliveroo certainly looks like a compelling growth play. 

Back in August, ROO revealed that the value of orders placed using its platform had more than doubled in the first six months of its financial year to £3.39bn. Importantly, the company also said that it had seen “no material impact” from the reopening of restaurants in Q2. This was always one of my biggest concerns with the stock and suggests that there has now been a permanent shift in consumer behaviour.

A spate of deal-making in recent months has also been very encouraging. Building on its existing partnership with German discounter Aldi, ROO has recently hooked up with another supermarket, Morrisons, to offer a rapid delivery service (Hop) in southwest London initially, 

Clearly, any signs of initial success with this initiative and news of more deal-making next week could reassure holders. It could also succeed in helping the Deliveroo share price recover its mojo after a wobbly September.

On the other hand…

As positive as recent developments have been, there are also a number of reasons to steer clear. Perhaps the most pressing of these is that investors are taking flight from previously-loved growth stocks such as ASOS, partly due to concerns over cost inflation and supply chain hold-ups.

One might rationally argue that Deliveroo is operating in a very different area. But it’s still part of the next-gen, tech-based business wave. What worries me is that ASOS is profitable. Deliveroo won’t be for some time. This makes it harder to accurately value its stock, and this ‘jam tomorrow’ strategy could really backfire if we see a rise in interest rates to quell inflation.

Competition is another concern. We’re not only talking Just Eat or Uber Eats here. Across the UK and Europe, new firms promising ultra-fast delivery have sprung up, attracting customers with big initial discounts. That means margins will likely be very small for everyone involved. It also makes ROO look unexceptional.

Interestingly, JP Morgan recently cut its target for the Deliveroo share price to 320p from 393p. That’s not encouraging in the run-up to next week’s update. However, it may be more realistic considering the challenges ahead. And to be fair, it would still give me a 15% gain from here.

My verdict

The Deliveroo share price still languishes far below its IPO value (390p). So long as the firm is able to continue winning market share and show progress towards making a profit, I think there’s a good chance of the company getting back to this level in time. The question, however, is just how long investors will be patient.

As things stand, I think we might see a brief rally on 20 October. That said, I’m still not tempted to buy today. To really get me interested, the Deliveroo share price needs to fall significantly.

I feel ROO definitely isn’t a bargain today.

The post Is the Deliveroo share price a bargain ahead of next week’s update? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS, Deliveroo Holdings Plc, Morrisons, and Uber Technologies. 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.

Let’s look a little closer at today’s best and worst-performing stocks, starting with the latter.

Today’s stock market losers…

In the FTSE 250, shares in animal genetics firm Genus were well out of favour. Despite the company revealing some very positive full-year numbers, investors didn’t like talk of a volatile pig market in China. Even the suggestion that this would be a “short term headwind” didn’t carry much weight. The Genus share price dropped 7.6%.

Budget airline easyJet was another heavy faller from the second tier, losing over 10% of its value by the close. This followed the announcement that the Luton-based business would be looking to raise £1.2bn from investors via a rights issue to boost its balance sheet. Also contributing to the tumble was news that the company had scorned a preliminary takeover approach. The identity of the potential buyer was not revealed but has since been rumoured to be peer Wizz Air. In today’s statement, easyJet said that it undervalued the business and the offer was unanimously rejected. 

Perhaps by association, FTSE 100 airline IAG was in the red. That’s despite yesterday’s rumours that the controversial traffic light travel system adopted by the UK government will be overhauled. Elsewhere in the top tier, Coca Cola HBC shed 4.4% of its value. DCC and Melrose Industries grabbed second and third spots, down 3.4% and 3.2% respectively. 

Morrisons slips as profits tumble

Back in the FTSE 250, takeover target supermarket Morrisons strayed into negative territory after revealing a 37% drop in profit over the six months to the beginning of August. The firm also announced a hit of £41m of Covid-19 costs and £80m in lost profit in sales from cafes, fuel and food-to-go. Despite reiterating previous guidance, it warned that rising costs in its supply chain could still impact near-term performance.

In other news, investors in online gambling firm 888 reacted negatively to the announcement that their company would be buying William Hill’s European business for £2.2bn. The deal would include 1,4000 physical shops. The former said that this purchase would give it “significantly enhanced exposure to sports betting“. But owners weren’t convinced. The shares slid by 3.3%.

…and winners

On a day that lacked any massive gainers on the FTSE 100, investment firm M&G and hotel company Whitbread were in demand. Housebuilders Persimmon and Barratt Developments held their own too. Despite falling back at the close, luxury brand Burberry also continued its gradual recovery. Investors had been dumping the stock recently following weaker-than-expected retail sales figures in China. The market is of huge importance to the FTSE 100 constituent.

Higher gains, however, could be found in the FTSE 250. Intellectual property business developer IP Group headed the second tier leaderboard with a 6.1% rise. It was closely followed by residential landlord Grainger, which managed 3.8%. Despite today’s lacklustre performance, The FTSE 250 has still managed to return 15.8% year to date, far more than the 6.9% achieved by the FTSE 100. 

The post Here’s what happened in the FTSE 100 and FTSE 250 today appeared first on The Motley Fool UK.

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Paul Summers owns shares in Burberry. The Motley Fool UK has recommended Burberry, Melrose, Morrisons, and Wizz Air Holdings. 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.

As my colleague Cliff D’Arcy highlighted last month, the last six months have seen a solid 30% growth in the Sainsbury’s (LSE: SNBY) share price. Partly due to the Covid-19 pandemic forcing people to eat more at home, the recent boost in price is also because of sentiment towards the sector linked to an attempted takeover of rival Morrisons. With the stock currently trading at just over 300p, is now a good time for me to buy shares in the UK’S second-largest supermarket chain? Let’s take a look.

Sainsbury’s results

As I mentioned above, the pandemic has played a massive role in the Sainsbury’s rise – and this was seen in its recent results. Total retail sales were up 7.3%, and digital sales rose by a staggering 102%. These sales now equate to 42% of total sales. The supermarket giant also acquired Argos back in 2016, whose sales grew over 10% for the year. Regardless of the fact stores are now open again without restrictions, I still think that many people will continue with online shopping as it is a convenient way to shop. This provides me with confidence when investing in Sainsbury’s. A continuation of this sort of performance is likely to lead to a rise in the Sainsbury’s share price.

Takeover news

Private equity firms have been on a shopping spree in the UK recently, with supermarket chains being targeted. The very speculative news of a potential takeover approach last month by US firm Apollo saw a 15% rise in the Sainsbury’s share price, while competitor Morrisons is the centre of attention from bids by private equity firms CD&R and Fortress. As it was decided this week that the final decision will be decided via auction, could it be that the loser eyes Sainsbury’s as an alternative? The supermarket certainly is an attractive buy, with strong recent performances and nearly 16% market share in the UK. A takeover would boost the Sainsbury’s share price.

What does concern me about Sainsbury’s is the level of competition I expect it to face in the future. Cheaper alternatives such as Aldi and Lidl continue to gain in popularity, and this could be a major issue. The German discounter has also begun to venture into the world of online shopping, starting with a click and collect service. This could threaten the Sainsbury’s online business, which was an important factor in its impressive results. Aldi has also been expanding its number of physical stores, with a target of 1,200 by 2025. A loss of market share could see the price of Sainsbury’s stock plummet.

Should I buy?

The most convincing factor for me to buy is the fact I see the chain as a viable acquisition target for a private equity firm. A takeover of this kind would see a large boost in the price of the stock. What does concern me, however, is competition. Market disruptors such as Aldi could pose a huge threat in the future. For this reason, I am going to avoid adding shares to my portfolio for now.

The post The Sainsbury’s share price is up 30%. Should I buy? appeared first on The Motley Fool UK.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons. 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.

The Morrisons (LSE: MRW) share price barely moved this morning, despite the company revealing a big fall in profit in its interim numbers. 

Falling profit

Total revenue (including fuel) for the six months to 1 August rose 3.7% to just over £9bn. But like-for-like sales (excluding fuel and VAT) were down 0.3%. This was in sharp contrast to the 8.7% increase reported in the same period last year.

Online like-for-like sales jumped 48% and are now up over 237.1% compared to two years ago, helped by the company’s relationship with Amazon. A total of 328 stores are also now working with Deliveroo to provide grocery home delivery. 

However, profit before tax and exceptionals tumbled 37.1% to £105m. This was due to £41m of pandemic-related costs and £80m in lost profit in sales from cafes, fuel and food-to-go. On a statutory basis, pre-tax profit fell 43.4% to £82m.

Looking ahead^ 

Morrisons made no change to its guidance. The UK supermarket expects profit before tax and exceptional items to be above the £431m recorded for 2020/21. However, this is dependent on a reduction in Covid-19 costs, lower lost profit and the company’s ability to manage cost increases relating to its supply chain.

Further ahead, the company expects “material benefits” in 2022/23 as a result of Covid-19 costs not being repeated and the “full recovery of lost profit”.

No dividend

Morrisons also confirmed it would be recommending Clayton, Dubilier & Rice’s offer of 285p per share to shareholders. The latter will be required to approve this offer at the company’s General Meeting in mid-October. This is likely to be the reason for the static share price today.

As a result of the expected takeover, the £7bn cap confirmed that it would not be paying an interim dividend to shareholders. 

The post Morrisons’ share price stays flat despite 37% fall in profit appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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.

Takeover bids

The recent Morrisons takeover news has brought a new focus on the UK supermarket industry. US private equity firm CD&R were pitted against competitor Fortress in a bid to buy Morrisons. This helped drive the Morrisons share price to all-time high territory.

This has been good news for the wider industry, with Sainsbury and Tesco both seeing share price increases of 5% and 10% in the past month.

Is Sainsbury the next target?

The Sainsbury share price leaped 15% when markets opened on 23 August. This seemed to signal investors believed Sainsbury could be a viable acquisition opportunity.

Looking at the current value of Sainsbury shares I believe there is a case for this. Shares are currently sitting at 303p and trading off a price-to-sales (P/S) ratio of 0.24. Competitors Tesco and Morrisons trade off slightly higher P/S ratios of 0.34 and 0.40 respectively. Sainsbury’s shares seem to offer good value here, an appealing attribute for a theoretical acquirer.

Looking at market shares, Sainsbury holds 16% of the UK market. This is significantly below Tesco’s 27%, but also above Morrisons’ 10%. This places Sainsbury as the second-largest company in its market.

The enterprise value (EV) of Sainsbury is also encouraging for the acquisition case. EV is a measure of the market cap plus net debt. This is essentially a figure of how much you would need to pay to acquire the business. Sainsbury’s EV is currently $13bn, not far off of Morrisons’ £10bn. Tesco on the other hand currently boasts an EV of £31bn. With Fortress and CD&R having total assets under management of £35bn and £16bn, respectively, I couldn’t see either of them bidding for Tesco. This leaves Sainsbury as a much more viable choice.

Therefore, I think there is a case for the acquisition of Sainsbury. This would undoubtedly lead to an explosion of the Sainsbury share price.

Long-term outlook

The most recent results are likely to have helped the Sainsbury share price too. Total retail sales were up 7.3%, and digital sales up 102%, now combining to 42% of total orders. Online shopping has been amplified because of the pandemic, with many people now sticking to shopping online. The fact that this part of Sainsbury’s business is so strong gives me confidence for the future.

Overall, I think it is fair to say an acquisition is viable. This could lead to an increase in the Sainsbury share price. However, I don’t like to base my investments on theoretical events – I don’t want that risk for my portfolio. I still think Sainsbury could prove a good long-term investment, but I won’t be buying any shares today.

The post Is the Sainsbury share price about to explode? appeared first on The Motley Fool UK.

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Dylan Hood has no position in any shares mentioned above. The Motley Fool UK has recommended Morrisons. 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.

Tesco share price interest

As I referenced in a previous article, competitor Morrisons has accepted a £7bn bid from US private equity firm CD&R. The bidding war for Morrisons led to its share price soaring over 60%. This interest seems to have rubbed off on the wider supermarket industry, with Sainsbury’s and Tesco also seeing their shares jump 5% and 10% in the last month, respectively. Any takeover speculation is likely to benefit Tesco shares, even if an acquisition never comes to fruition. 

Not that the share price has been on an uninterrupted upward trajectory. The Tesco share price fell sharply in February, but it wasn’t anything to worry about. In early 2021, it announced a special 50.93p dividend would be paid to investors. This was made possible by the £5bn sale of its Asian businesses. The shares fell almost 30% in the process as it performed a share consolidation. This meant 15 new shares were issued for every 19 existing ones — and investors became £5bn richer in the process. 

Tesco currently boasts a healthy 3.91% dividend, significantly higher than the FTSE 100 average of 3.3%. This would make Tesco a great income addition to my portfolio, I feel, and is another reason I like the stock. 

Brexit problems

There are risks, however. Brexit food shortages have been exacerbated by the pandemic. This has sparked fears of increasing future food prices. In July, the British Retail Consortium (BRC) shop price index showed that average food prices had declined 0.8% year-on-year. However, BRC Chief Executive Helen Dickinson added that “rising commodity prices and Brexit red tape” were creating an unsustainable price environment for the UK supermarket sector. Moving forward, this could be a problem for Tesco shares.

In addition to price problems, the HGV driver shortage is putting increased strain on the sector. Analysts have estimated a shortfall of 90,000 drivers could lead to food shortages during Christmas and into 2022. This will inflate prices further and could also damage the Tesco share price.

A cheap buy?

Tesco shares are currently trading at a P/E ratio of 19x, significantly above the FTSE 100 average of 15.8x. However, I expect this number to drop if Tesco is able to meet its earnings targets for the quarter. It reported a 13% increase in like-for-like sales in Q1, which should help drive up earnings. 

Aside from this, the UK supermarket sector is a good defensive play, I feel. People will always need food. Although Brexit is already causing problems, I don’t believe these will be too heavily reflected in share prices. Overall, although don’t think Tesco shares will make any crazy gains in the near future, I like Tesco as a solid income option for my portfolio.

The post Should I buy Tesco shares today? appeared first on The Motley Fool UK.

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Dylan Hood has no position in any shares mentioned above. The Motley Fool UK has recommended Morrisons and Tesco. 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.

Bidding war

The standout driver behind the Morrisons share price is the bidding war for its acquisition. This is between US private equity firms CD&R and Fortress and has been heating up over the past few months. CD&R had initially offered a £5.5bn bid which was declined by the Morrisons board after being considered undervalued. Fortress then entered the scene with an increased £6.7bn bid, a 272p share offer. This was recommended by the Morrisons board to investors. However, CD&R then came back with a £7bn offer which was accepted by Morrisons last week.

This £7bn offer marks a per-share value of 285p. When the offer news broke, the share price jumped from 279p to above 290p. Fortress has been left “considering its options”, but British takeover rules still allow Fortress to submit a higher offer. If this was the case and the bidding war continues, I think we could see the short-term Morrisons share price push higher. What’s more, there is talk among analysts that Morrisons partner Amazon could enter the bidding war. If this were to happen, prices could be pushed up even further.

Valuation problems

The bidding war seems to be good news for the short-term Morrisons share price. However, it has also led to a pretty steep valuation of the company. The current Morrisons price-earnings (P/E) ratio is 72.5 times. Comparing this with a similarly priced competitor like Tesco who has a P/E ratio of just 4 times begs the question of whether the Morrisons share price is vastly overvalued.

There are also further complications that Brexit has brought to the food retail sector. Worries of potential shortages well into 2022 are likely to halt growth in the industry. Industry leaders have urged the government to relax immigration rules to fill growing gaps in the workforce. Moving forward, this could be a major concern for the Morrisons share price.

Morrisons share price: the verdict

The short-term price moves will be made in reaction to new bidding news. This could certainly push the Morrisons share price higher. However, this is too hypothetical for me to add Morrisons to my portfolio just yet. I prefer to focus on the tangibles such as valuation and Brexit. For me these factors currently outweigh the opportunity the bidding price war brings. Therefore, although I believe the Morrisons share price could theoretically climb higher, I won’t be adding it to my portfolio today.

The post Can the Morrisons share price keep climbing higher? appeared first on The Motley Fool UK.

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Dylan Hood has no position in any of the shares mentioned above. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Morrisons and Tesco and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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.

Has Dechra been doing well?

You could say that. Thanks to a combination of manufacturing sites remaining operational during the pandemic and the explosion of pet ownership, this firm has been very busy indeed. As CEO Ian Page said recently, it’s clear “people have been spending more time with their pets and have therefore been more cognitive of their welfare”.

All this has really boosted DPH’s top line. In July, the company said a “stronger than expected trading performance” had continued to the end of June. It now expects group revenue for the full year to come in 21% higher.

Pleasingly, a good amount of this growth was organic. However, the acquisitions of products such as ear infection gel Osurnia and weight gain drug Mirataz have also helped. The latter is already performing “ahead of expectations” following its launch. 

FTSE 100 beater

As one might expect, such robust trading has done the DPH share price no harm. Having climbed nearly 70% over the last 12 months, the company is currently valued at £5.7bn. In sharp contrast, the FTSE 100 has climbed ‘just’ 19% since August 2020. 

This difference in returns is even starker over the long term. Had I bought the stock five years ago, I would have trebled my money. The FTSE 100 is up a little less than 4% since 2016. In short, Dechra Pharmaceuticals is another example of how investing in a fairly concentrated group of individual stocks has the potential to deliver a far better return than the index.

Sky-high valuation

This is not to say there are no drawbacks to investing here.

The first relates to its valuation. Having done so well, the shares now look seriously expensive to acquire at 46 times earnings. For that price, I want to see a company generating things like sky-high returns on capital. That’s not the case here. Yes, pet ownership shows no signs of decreasing. And yes, the share price could also conceivably rise as FTSE 100-focused funds are forced to buy. However, I’m still not sure I’d be getting great value for money.

Despite being a regular dividend-hiker, DPH also wouldn’t be my first choice if I were looking to produce income from my investments. Based on a potential 41.1p per share return in the current financial year, the stock yields just 0.7%. That’s a lot less than that offered by some stocks in the top tier. Even the FTSE 100 index as a whole yields 3.4%.

I’d buy the (inevitable?) dip

As someone who’s hugely positive about companies operating in the petcare space, I’m not surprised by Dechra’s almost certain promotion to the FTSE 100. Then again, I can’t help but think that an awful lot of good news is priced in. So, this business stays on my watchlist for now. Should markets take a turn for the worse and good stocks fall alongside bad ones, I’ll be more likely to pull the trigger. 

The post FTSE 100 reshuffle: time to buy this hot growth stock? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt and Morrisons. 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.