Can Pets at Home shares continue their recovery? (LSE:PETS)

The UK is renowned as a pet-loving nation, and Pets At Home (LSE:PETS) has positioned itself as a leading brand providing pet owners with a one-stop location for all their needs, from food and accessories to health and grooming services. However, that unconditional love has appeared to fade for the share price of this company.

Unloved share

The somewhat neglected share price of PETS has been in a downward trend, since peaking at £3.12 in October 2015. During this period shorts have been steadily increasing with a significant rise in the past month ahead of last week’s Final Results for FY2016. According to the FCA, reported short positions above 0.5% now stand at 7.63% coinciding with the share price hitting a new all-time low of £1.54 last week.

Was such pre-results apprehension justified?

It does not appear to have been. PETS reported profits in line with expectations with group revenue increasing by 7.2% to £834.2m and pre-tax profits climbing to £95.4m, a healthy 5.8% increase. While many physical retailers justifiably face negative sentiment based around the ongoing switch to online shopping, Pets At Home holds a couple of Ace cards. While its retail sales rose a modest 2.9%, it’s service-based revenue, which includes it’s Veterinary and grooming services shot up an impressive 44.5%.

At a share price of £1.62, the company looks cheap on a P/E of around 10.8.

The future

In its outlook statement for 2018, the company states its dividend payment will be maintained at least at the prior-year level and with the pet industry expected to maintain its 4.5% annual growth, profitable growth for PETS is forecast to continue.

The Ex-Divided date of 15th June is fast approaching with a payment of 8.42p, yielding a decent 5.15% return at current levels.

Technical Analysis

From a technical analysis point of view, the chart is already hinting that a potential reversal may be in progress with a strong bounce off the lows at the end of last week. As you would expect at all time lows, the RSI indicates it is in a very oversold territory. Sentiment is king, and perhaps once the results are fully absorbed, (particularly noting the growth of the service revenue,) the share price may start to climb ahead of Ex-Divi day. A close below £1.56 may signal further downside, while resistance is expected at £1.90 and £2.05. However, should PETS realign itself again with the Industry standard P/E of 18, a reasonable long-term target could well be around £2.70. With the current heavy shorting of this stock, any decent northerly momentum could gather significant pace.

 

Disclaimer

The author of this piece holds positions in PETS.

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