The Pets at Home (PETS:LON) share price has tanked recently. Currently, shares in the UK pet care business can be snapped up for 240p – about 22% below the closing price on 7 November. Is there an opportunity here for value investors? Let’s take a look.
Pets at Home: the business
Pets at Home is the UK’s largest pet care business. Operating over 450 stores across the country, it sells pet food and other pet products, and also offers veterinary and pet grooming services.
Pets at Home is listed on the London Stock Exchange’s main market, and it is currently a member of the FTSE 250 index. At today’s share price of 240p, it has a market cap of around £1.1bn.
Why has the Pets at Home share price dropped?
The recent share price crash can be attributed to the company’s half-year results, which were posted on 27 November. It’s fair to say that these were underwhelming.
For the 28 weeks to 10 October, revenue from the company’s retail segment (which accounts for the majority of total revenue) was only up 0.1% to £696.3 million. Overall, group revenue increased just 1.9% to £789.1 million.
It was probably the guidance that spooked investors the most. Looking ahead, management said that it expects the pet retail market to remain ‘unusually subdued’ for the rest of FY2025. As a result, it only expects modest growth in underlying profit before tax for the year.
It’s worth pointing out that there were some positives in the H1 results. One highlight was 18.6% revenue growth from the vet division. Another was a 4.4% increase in the H1 dividend payout.
Overall though, the results weren’t great.
Is Pets at Home a good stock to buy today?
Is there an opportunity for investors after the recent share price drop? Possibly.
The stock’s valuation is certainly low today. At present, the consensus earnings per share forecast for FY2026 is 22.8p. So, at the current share price of 240p, the forward-looking price-to-earnings (P/E) ratio is just 10.5. For reference, the median forward-looking P/E ratio for the FTSE 250 is about 13.
It’s worth noting here that there has been some insider buying in the last week. On 28 November, CEO Lyssa McGowan bought approximately £100,000 worth of Pets at Home shares at a price of £2.36 per share. This is a notable development, in my view. It suggests that she sees value in the shares at present and expects them to rise.
Turning to the dividend yield, it looks attractive after the share price fall. For the current financial year, analysts expect a total payout of 13.4p. So, we are looking at a yield of around 5.6% at present. Dividend coverage looks solid at around 1.5 times.
With that yield on offer, it looks like investors could be paid to wait for a recovery in the share price. Of course, there are no guarantees that the share price will actually rebound. Yet in the H1 results, management said that it is confident that current market conditions are ‘temporary’. It believes that market growth will pick up in the future and support higher business growth.
Risks to consider
Before you rush out and buy the shares, however, it’s important to consider the risks. There are a few that are worth highlighting.
One is rising competition. In the years ahead, Pets at Home is likely to face intense competition from online rivals such as Amazon (AMZN) and Zooplus, which may be able to offer more products at lower prices. It is also likely to face competition from pet food brands themselves, which are increasingly selling direct to consumers. An example here is Lily’s Kitchen, which has set up its own online sales platform.
Another risk is rising costs. In the recent UK Budget, the government announced changes to the National Living Wage and employers National Insurance Contributions and the company says that these will increase costs by around £18 million next year. That could be a big hit to profits. Last financial year, underlying profit before tax was only £132 million.
A third risk is regulatory intervention. Recently, it came to light that the UK’s Competition and Markets Authority (CMA) is investigating how vet services are bought and sold. It is concerned that pet owners may not be getting a good deal. So, there is some uncertainty here.
Finally, it’s worth pointing out that Pets at Home shares have not been a super long-term investment. Over the last 10 years, the share price has only risen about 20%. That’s quite disappointing given the growth of the pet care market over this period. Many other pet care stocks such as IDEXX Laboratories (IDXX), Zoetis (ZTS), and Zooplus have done much better.
Pets at Home Forecast
My view on Pets at Home shares
If the UK pet care market does pick up, this stock could turn out to be a decent investment from here. There’s definitely room for a valuation rerating at some point. Add in the 5%+ dividend yield, and investors may do well in the years ahead.
It’s not a ‘high conviction’ buy for me though if I’m honest. With this stock, there are quite a few risks that could derail the bull case. And I have some doubts over the company’s competitive advantage.
Pros
- Low valuation
- High dividend yield
- Insider buying
Cons
- Rising costs
- Lots of competition
- Regulatory risk
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Outlook
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Overall
3Edward Sheldon owns shares in Amazon.
Based in London, Edward is a distinguished investment writer with an extensive client portfolio comprising a diverse array of prominent financial services firms across the globe. With over 15 years of hands-on experience in private wealth management and institutional asset management, both in the UK and Australia, he possesses a profound understanding of the finance industry.
Before establishing himself as a writer, Edward earned a Commerce degree from the prestigious University of Melbourne. Complementing his academic background, he holds the esteemed Investment Management Certificate (IMC) and is a proud holder of the Chartered Financial Analyst (CFA) qualification.
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