Breakout Stock On today’s TSX Breakouts report, there are nine stocks on the positive breakouts list (stocks with positive price momentum), and 58 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is an oversold stock that is on the negative breakouts list – Pet Valu Holdings Ltd.
Based on the analysts’ target prices, the potential upside appears to outweigh the downside risk; however, investors may have to be patient. The average one-year target price is $37.55, implying the share price has 47 per cent upside potential over the next 12 months.
Supporting analysts’ bullish outlooks is the stock’s valuation. The stock is currently trading at a trough multiple on a forward enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) basis.
However, a number of headwinds may keep buyers on the sidelines in the near-term.
A brief outline on Pet Valu is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Pet Valu Holdings Ltd
25.94-2.84 (-9.87%) Year to date
The company
Headquartered in Ontario, Pet Valu operated 783 pet stores across the country in 2023, of which 72 per cent were franchise stores and 28 per cent were corporate stores.
As of the end of the first quarter of 2024, the company had 794 stores in 10 provinces: 359 stores in Ontario, 133 in B.C., 93 in Alberta, 88 in Quebec, 36 in Nova Scotia, 27 in Manitoba, 25 in Saskatchewan, 19 in New Brunswick, 11 in Newfoundland and Labrador, and three in Prince Edward Island.
The company’s store banners include: Pet Valu, Chico, Bosley’s, Paulmac’s Pets, Total Pet and Tisol.
Investment thesis
Drivers:
- Seasoned management team. Prior to joining Pet Valu, president and chief executive officer Richard Maltsbarger worked at Lowe’s Companies for 14 years, most recently as the chief operating officer of U.S. operations.
- Industry leader. According to the company’s May investor presentation, Pet Valu has a market share of 18 per cent, followed by PetSmart at 15 per cent and then Walmart at 11 per cent.
- Defensive business.
- Healthy balance sheet to fund its growth. At quarter-end, the leverage ratio stood at 2.1 times.
- Low valuation relative to historical levels.
Headwinds/potential key risks to consider:
- Muted or potentially negative earnings growth. Management targets adjusted earnings per share of between $1.57 and $1.63 in 2024, compared to $1.61 reported in 2023.
- Store traffic down year-over-year in the first quarter (fewer shoppers). On the earnings call, the CEO indicated that consumers are purchasing larger food bags (more economical), which is contributing to fewer needed store visits.
- Single-digit same-store sales growth. For 2024, management targets same-store sales growth of between 2 per cent and 5 per cent, below its 8-year average of 11 per cent.
- Negative currency impact from a declining Canadian dollar. Approximately 23 per cent of its 2023 purchases were denominated in U.S. dollars.
- Economic weakness.
Quarterly earnings and outlook
Before the market opened on May 7, the company reported its first-quarter results.
System-wide sales, which includes sales from corporate, franchised stores and e-commerce sales, totaled $352.9-million, up 3.9 per cent year-over-year. Same-store sales growth was 0.8 per cent, driven by higher sales per basket (up 3.2 per cent), but offset by lower traffic (down 2.3 per cent). Revenue, which excludes franchised store sales, came in at $260.8-million, up 4.2 per cent year-over-year, relatively in-line with the consensus estimate of $259-million. Adjusted EBITDA was $56.6-million, up 15.9 per cent year-over-year, and ahead of the Street’s forecast of $53.5-million. The adjusted EBITDA margin was 21.7 per cent. Adjusted earnings per share came in at 35 cents, above the consensus estimate of 31 cents and up 9.4 per cent from 32 cents reported during the same period last year.
During the quarter, 11 new stores were opened. That day, the share price declined nearly 4 per cent on high volume.
On the earnings call, chief financial officer Linda Drysdale addressed management’s outlook, “We are excited about several key strategic initiatives planned to launch in the quarter, such as the launch of our Performatrin Culinary [Performatrin is the company’s store brand] currently underway, the activation of goods-to-picker automation within our new GTA DC [distribution centre] in June, and the go-live launch of our upgraded digital platform in the coming weeks.
“Each of these initiatives will have specific startup costs to consider in the quarter, and we also have completed our targeted pricing changes on key value items in April and May. Given all of this and our trends to date, we expect Q2 [second quarter] same-store sales growth to be similar to our Q1 [first quarter] performance, and expect Q2 adjusted EBITDA margin to be similar to last year, before improving in the back half.”
For 2024, management targets opening between 40 and 50 stores, bringing its store count up to between 823 and 833 stores. Same-store growth is expected to be between 2 and 5 per cent. Revenue is anticipated to increase between 5 per cent and 8 per cent year-over-year to between $1.11-billion and $1.14-billion. Adjusted EBITDA is expected to rise between 7 per cent and 10 per cent to between $248-million and $254-million. Earnings per share is anticipated to come in at between $1.57 and $1.63 compared to earnings per share of $1.61 reported in 2023.
Longer-term, management’s key objectives remain: 1) expand its store count to over 1,200; 2) deliver strong same-store sales growth; and 3) improve the company’s profitability (i.e. margin expansion).
Dividend policy
The company pays its shareholders a quarterly dividend of 11 cents per share of 44 cents per share yearly, equating to a current annualized yield of 1.7 per cent.
In March, the company announced a 10 per cent dividend increase, lifting its quarterly dividend to its current level of 11 cents per share from 10 cents per share.
Analysts’ recommendations
The stock has 11 buy-equivalent recommendations and two hold recommendations (from Stifel’s Martin Landry and ISS EVA’s equity research team).
The firms providing research coverage on the company are: ATB Capital Markets, Barclays, Beacon Securities, CIBC World Markets, Cormark Securities, Desjardins Securities, Eight Capital, ISS-EVA, National Bank Financial, RBC Dominion Securities, Sadif Investment Analytics, Stifel Canada and TD Cowen.
Revised recommendations
In May, multiple analysts revised their expectations.
- ATB’s Chris Murray lowered his target price to $41 from $42.
- Barclays’ Adrienne Yih increased her target price by $4 to $37.
- CIBC’s Mark Petrie lifted his target price to $36 from $34.
- The research team at ISS-EVA upgraded the stock to a “hold” from an “underweight” rating.
- Stifel’s Martin Landry downgraded the stock to a “hold” from a “buy” recommendation and lowered his target price to $32 from $33.
- TD’s Mike Van Aelst bumped his target price to $38 from $37.
Financial forecasts
For 2024, the Street is forecasting EBITDA of $251-million and earnings per share of $1.58. For 2025, the consensus EBITDA and earnings per share estimates are $277-million and $1.78, respectively.
Earnings forecasts have been coming down. At the beginning of the year, the consensus EBITDA estimates were roughly $258-million for 2024 and $285-million for 2025. The consensus earnings per share estimates were approximately $1.70 for 2024 and $1.96 for 2025.
Valuation
The stock is trading at trough levels.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 9.1 times the 2025 consensus estimate, which is the lowest multiple since the stock was publicly listed in 2021. On a price-to-earnings basis, the stock is trading at 14.4 times the 2025 consensus estimate, near its lowest forward multiple since the stock was publicly listed. In October of 2023, the forward P/E multiple troughed at approximately 13 times.
The average one-year target price is $37.55, implying the share price has 47 per cent upside potential over the next 12 months.
Insider transaction activity
Year-to-date, one insider has reported trading activity in the public market.
On May 28, chair of the board of directors Anthony Truesdale exercised his options, receiving a total of 83,692 shares at undisclosed prices and sold 83,692 at an undisclosed price leaving 91,472 shares in this particular account.
Chart watch
Given that the stock has a limited trading history, technical analysis is somewhat limited. The stock began trading on the Toronto Stock Exchange in June 2021.
The share price has declined 20 per cent after the company released its first-quarter earnings results on May 7. The share price closed at $25.61 on June 14, down from $32.07 on May 6.
The stock is in deeply oversold territory with a relative strength index (RSI) reading of 24. Generally, an RSI reading at or below 30 reflects an oversold condition.
Looking at key technical resistance and support levels, the stock faces initial overhead resistance around $30. After that, there is a ceiling of resistance between $32.50 and $33. Looking at the downside, there is strong technical support around $24. Since the stock began trading, its lowest closing price was $23.75, set on Oct. 5, 2023.
ESG Risk Rating
According to risk provider Sustainalytics, Pet Valu has an environmental, social and governance (ESG) risk score of 18.5 as of May 23, 2024. A risk score of between 10 and 20 reflects a ‘low risk’ rating.