There are some excellent stocks to choose from in the FTSE indices. Today, I’ve been looking specifically in the FTSE 250. It’s the UK’s more domestically-oriented stock index of companies.
Here’s a stock in this index I’d snap up today.
The investment case
The company I’ve been looking at is Pets at Home (LSE: PETS), the omnichannel retailer of pet products. The website says it’s the UK’s leading pet care business, “providing everything a pet owner needs”.
Before I dig into the business, let me point out that there’s a growing industry for pet products in the UK. According to Statista, consumer spending on pets increased to £7.9bn in 2020. What’s more, the share of households owning a pet in the UK increased to 59% last year, up from 41% in 2020. This growth of the wider pet industry should really benefit Pets at Home going forward.
The business has been trading very well recently. In the third-quarter results to 31 December, Pets at Home upgraded its full-year profit before tax to £140m, which was above previous analysts’ expectations. Management said this was due to “strong continued momentum” heading into the final quarter. Indeed, like-for-like revenue growth has been very impressive of late. This was 17.5% for the nine months to 31 December compared to the same period in 2021.
With strong sector tailwinds from the booming pet industry in the UK, and continued business momentum, the investment case looks attractive in my view.
Risks to consider
There are always risks with any investment, so I need to weigh these up for this FTSE stock. Pets at Home did warn of inflationary pressures recently due to ongoing supply chain issues. Price rises may begin to compress profit margins in the business, and therefore earnings may reduce. On the other hand, rising inflation may also dampen consumer spending, and then reduce sales.
Competition is also something to consider. Online delivery has been a major growth driver for Pets at Home during the pandemic. However, a company like Amazon, which is a much bigger online retailer, could steal market share. This would impact growth forecasts for Pets at Home.
Should I buy this FTSE stock?
I need to understand the valuation before I buy the shares. Its price-to-earnings (P/E) ratio shows Pets at Home is valued on a multiple of 20 for fiscal year 2022 (the 12 months to 31 March). The P/E ratio drops to 18 for fiscal year 2023. This isn’t dirt-cheap by any means, but it seems reasonable given the positive momentum in the business.
Another way to look at valuation is using free cash flow yield. For fiscal year 2023, this is expected to rise to 5%. It shows that Pets at Home is cash generative, and it’s planning to use some of this cash to increase the dividend. Analysts are expecting the dividend yield to rise to 3% next year.
All in all, I think this FTSE stock is an excellent buy for my portfolio. It’s not without risks, but the company is trading well, and should benefit from rising pet ownership in the UK.
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Dan Appleby has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
