After “strong underlying demand, compelling business model” drove better-than-expected third-quarter results, RBC Dominion Securities analyst Irene Nattel raised her rating for Pet Valu Holdings Ltd. to “outperform” from “sector perform,” seeing “strong momentum” following a raise to its 2021 guidance.
“Two quarters post-IPO, PET is delivering results well above expectations and ahead of its long-term growth algorithm,” she said. “Key drivers of performance include very strong same-store sales underpinned by pet adoption rates with scaling and franchise model contributing to GM expansion. While pace of revenue growth should cool as adoption rates normalize, TAM and gross margins are likely to remain above prior expectations notwithstanding accelerating inflation, notably wages and supply chain costs.”
Before the bell on Tuesday, the Markham, Ont.-based company reported revenue of $201-million, up 26 per cent year-over-year and topping Ms. Nattel’s $177-million forecast, driven by same-store sales growth of 20.3 per cent. Adjusted EBITDA of $51-million also easily topped her forecast ($35-million)
Concurrently, the company raised its 2022 earnings per share guidance by 24 per cent to 97 cents with same-store sales growth slightly above 15 per cent. Ms. Nattel had previously expected 78 cents.
“While we anticipate rising wage and supply chain costs (both incremental and inflation driven) to remain key themes through 2022, in our view, the combination of strong pet adoption rates, market share gains, network growth, fixed cost scaling, franchise structure leverage, and efficiencies should more than offset headwinds,” she said. “Against this backdrop, we raise our F22 and F23 estimated EBITDA by 10 per cent, driving a 14-per-cent increase in EPS forecasts.”
Citing “sustainable growth, FCF growth, and high return franchise mode,” the analyst raised her recommendation and increased her target for Pet Valu shares to $40 from $34. The average target on teh Street is $38.50.
“PET presents a compelling, SMID-cap opportunity in a growing and defensive segment of specialty retail with forecast earnings growth/returns at the higher end of our coverage universe,” she said. “With the share price down 8 per cent from recent highs, and an even more pronounced valuation contraction in light of upward earnings revision, we view the stock’s current level as an attractive entry point.”
Elsewhere, CIBC’s Mark Petrie increased his target to $43 from $34 with an “outperformer” rating, while National Bank’s Vishal Shreedhar raised his target to $35 from $33 with a “sector perform” rating.
“Pet Valu reported blowout Q3 results with same-store sales (SSS) growth well ahead of forecast and excellent GM% leading to earnings well ahead of our estimates and consensus,” said Mr. Petrie. “We continue to believe PET is very well-positioned to take share in a healthy industry with sustained tailwinds. Our Q4 estimates rise with the boosted outlook and our F2022 estimate follows suit.”