Interactive Investor

Pets at Home among 11 consumer stocks tipped to succeed

25th May 2022 12:48

Graeme Evans from interactive investor

Many consumer stocks are trading well below their best price, and this team of experts has identified a number of stocks they believe are undervalued. 

Tailwinds provided by the UK’s growing cats and dogs population today showed why Pets at Home Group (LSE:PETS) is on a City firm’s 11-strong buy list of consumer stocks for “choppy waters”.

The shares rose 26.2p to 307p after today’s encouraging annual results, but analysts at Liberum have a target price of 510p, based on their belief that the retailer’s earnings are at relatively less risk than others due to the defensiveness of pet care spend.

It pointed to momentum in key performance indicators such as the 18% growth in active VIP customers and 36% growth in Puppy and Kitten Club membership. The latter figure averaged 23,000 weekly registrations in the 2022 financial year, versus 7,000 pre-pandemic amid the creation of a significant longer term opportunity.

The shares are on about 13 times 2022 earnings, which Liberum points out is a 50% de-rating from September 2021. The valuation is supported by a healthy balance sheet, 3.9% dividend yield and expectations for a return to double-digit profit growth in the 2024 financial year.

On Monday, the broker slashed its profit forecasts for the wider consumer sector by about 18% for 2023 and 24% for 2024 in a reflection of the economic outlook as real incomes and living standards are squeezed by high inflation.

Liberum analyst Wayne Brown said: “Valuations look cheap, but what we do not know is if these cuts go far enough.

“That said, with every downturn, we always enter a phase when negative news is priced in – so we would advocate not dismissing the consumer sector where there is serious upside to be had given how bombed out valuations have become.”

As well as Pets at Home, his favoured stocks are AG Barr (LSE:BAG), Accrol Group Holdings (LSE:ACRL), B&M European Value Retail SA (LSE:BME), Cake Box Holdings Ordinary Shares (LSE:CBOX), Card Factory (LSE:CARD), Fevertree Drinks (LSE:FEVR), Frasers Group (LSE:FRAS), Hotel Chocolat Group (LSE:HOTC), Superdry (LSE:SDRY) and Wickes Group (LSE:WIX).

Stocks rated at “buy” but with no near-term catalyst are Currys (LSE:CURY), DP Eurasia NV (LSE:DPEU), Halfords Group (LSE:HFD), In The Style Group (LSE:ITS), Made.com Group (LSE:MADE), Next (LSE:NXT), Science in Sport (LSE:SIS), Topps Tiles (LSE:TPT), Virgin Wines UK (LSE:VINO) and Zalando SE (XETRA:ZAL).

Today’s figures show that spending at Pets Home stores held up well in the retailer’s financial year to 31 March, with sales of £1.3 billion representing like-for-like growth of 15.8% on a year ago and 25.9% on the same pre-pandemic period.

Underlying profits rose by 65.3% to a bigger-than-expected £144.7 million, with growth of 54.8% on a two-year basis. Despite the impact of raw material, energy, and freight costs, the chain sees current year profits in line with analyst consensus at about £151 million.

Its confidence in the outlook is highlighted by a final dividend payment of 7.5p a share, which is 36% higher than a year ago.

Peel Hunt’s list of stocks for potential recession proofing, which it published last week, featured Pets at Home alongside retail peers JD Sports Fashion (LSE:JD.) and Dunelm Group (LSE:DNLM).

The broker said: “Attitudes vary from country to country, but in the UK pets are very commonly the most important ‘person’ at the table, and the notion that owners would either trade down in food or reduce vet visits is just wrong in our view.”

The note said the food side of the business was misunderstood, given that changing to lower grades of product can increase the risk of illness or result in a lack of energy or vitality.

While some areas of the retailer’s discretionary markets will be affected in a recession, Peel Hunt said the high proportion of sales accounted for by food and vet visits gave the bottom-line more stability than the market currently prices in.

Ahead of today’s results and with a price target of 475p, the broker said: “The valuation currently expects more bad news than we consider likely.”

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