Stock market

According to a City broker, this unwanted UK stock could rise by 120 per cent.

Image source: Getty Images

A UK stock that looked like a no-brainer buy recently. CVS Group (LSE: CVSG).

As the operator of vet practices, diagnostic centers, an online retail business, and even a pet cemetery, CVS was riding the coattails of a secular boom in all things pet-related.

Then in September the UK’s antitrust watchdog came along and jumped into an ancient pond like a muddy Labrador, clouding the water for CVS shareholders.

In particular, the Competition and Markets Authority (CMA) announced that it would look into fees charged for veterinary services. “The veterinary industry has consolidated considerably in recent years, so now is the right time to take a look at how the market is performing.,” he said in a statement.

Indeed, there has been consolidation, and CVS has been very much behind it, winding down a number of small veterinary practices. Unsurprisingly, investors panicked and the stock is down 48% after the announcement.

Now, though, analysts at Berenberg Bank believe the sell-off is overdone. On 21 May, the broker reiterated a 2,370p share price target. This is 120% higher than the current price of 1,074p!

So, should I squirrel away some shares? Let’s take a look.

Belt tightening on wet sector

On 23 May, it was announced that the CMA would launch a full investigation into the UK’s £5bn vet market. The investigation is expected to take about 18 months.

The supervisor said:We hear from people who are struggling to pay their doctor’s bills, potentially overpaying for medications and not always knowing the best treatment options available to them.

Of course, the big risk here is that it could affect CVS’s market position and growth potential. This can be done to limit prescription fees. In a worst-case scenario, it may be forced to divest certain assets.

Interestingly, the share price rose 3% in response to the news. This suggests that most of the bad news may already be priced into the stock.

Some things I like.

From an investment perspective, there are three things I like here.

Firstly, 16 million households across the UK have a pet. And owners will spend on their furry companions regardless of whether the economy is going to the dogs or not. It is a flexible market.

Second, the company is growing its profits rapidly, from £10.7m in 2018 to a forecast £67m in financial year 2024 (which ends in June).

Finally, as things stand, CVS is trading at an attractive valuation. Its forward price-to-earnings (P/E) ratio is just 11.5.

This is lower than its historical average and rivals. Pets at home (13.7).

Time to bounce?

I wonder if this is a timely opportunity or one to avoid.

A few years from now, once the investigation is over, the stock could double. Then, the result may not be favorable.

In the meantime, that’s an 18-month wait, during which time the stock could move lower.

Still, I keep hearing Warren Buffett’s timeless words in my head: “Fear when others are greedy and when others are fearful

There’s a lot of fear surrounding the stock today, so it’s on my watch list while I weigh what to do.

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button