Pet Health Is Still A Growth Market
Growth stocks have been getting pummeled this year due to fears of slowing growth, tightening margins, and recession but in some cases, the baby is getting tossed out with the bathwater. In this case, it’s more like the puppies and kittens are getting tossed out with the bathwater but the meaning is the same. Pet Health, estimated at $11 billion in 2021, is growing at a high-single-digit CAGR and it is expected to be resilient in the face of inflation and shifting consumer habits. In this light, we think the recent valuations on names like Petco Health (NASDAQ:WOOF) And Chewy (NYSE:CHWY) are too good to pass up.
Petco Health And Wellness Navigates Inflation
Needham issued an update on Petco Health And Wellness in early June following a meeting with management. Management told them that not only were they able to successfully pass price increases through to their customer base but they saw little to no evidence consumers were trading down. This is significant news for the pet care industry due to the fact premiumization of products like food and care items is a driver of growth and bottom-line results. Needham carries a Buy rating on the stock with a price target of $30 compared to the broader consensus of Hold and $21.58. That target implies about 50% of upside for the stock with another almost 50% implied by the Needham target.
Price action in Petco Health And Wellness hit a new low prior to the Q2 earnings report issued in late May. The price action bottomed in the wake of the report and is now retesting support at the key level of $14.60. Assuming this level holds as support, we expect to see the short-sellers begin covering as well and that (about 22% short interest) could lead stocks up to the $17.80 level very quickly.
Chewy Gets Upgraded, Twice
Chewy was recently upgraded not once but twice adding strength to the idea these stocks are deeply undervalued. The upgrades come from Needham and Wedbush which both raised their ratings from Neutral to Outperform/Strong Buy with price targets in line with the Marketbeat.com consensus. The consensus is expecting about 50% of upside for the stock citing inelasticity in the industry and the prospect of widening margins as costs come down.
Shares of Chewy are also suffering from short-selling but the short-covering has already started. The stock put in a bottom in late May/early June and it appears to be in reversal. The price action still needs to get above resistance at the $40.60 level but we don’t think it will be hard. The company next reports earnings at the end of August and should be able to easily outpace the current consensus estimate of $2.45 billion in revenue.
Petmeds Is Late To The Game
PetMed Express (NASDAQ:PETS) was among the first pet health companies to go public but it is one of the last to embrace omnichannel selling and an expanded product line. That shortfall is costing the company in more ways than one and has resulted in dwindling sales even while its peers and the industry are growing. And don’t be fooled by the dividend, either. The company says it is committed to paying the dividend but it doesn’t look very safe to us at 6% of the share price and more than 100% of the earnings.
