Tuesday’s TSX breakouts: A deeply oversold consumer stock with a forecast gain of over 40%

On today’s TSX Breakouts report, there are 17 stocks on the positive breakouts list (stocks with positive price momentum), and 20 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. (PET-T). Quarter-to-date, Pet Valu is one of the worst performing stocks in the S&P/TSX Consumer Discretionary Index, behind Aritzia Inc. (ATZ-T). While the downtrend remains in place, the stock is approaching strong technical support around $30.

After the market closes on Wednesday, U.S. online pet products retailer Chewy Inc. (CHWY-N) will be releasing its quarterly earnings results. While Chewy currently does not serve the Canadian market, it is a good industry comparison to monitor market trends.

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.

The company

Headquartered in Ontario, Pet Valu operates over 750 pet stores across the country, of which 70 per cent are franchise stores and 30 per cent are corporate stores. As of April 1, the company had 348 stores in Ontario, 124 in B.C., 88 in Alberta, 82 in Quebec, 30 in Nova Scotia, 26 in Manitoba, 23 in Saskatchewan, 19 in New Brunswick, eight in Newfoundland and Labrador, and three in Prince Edward Island. The company’s store banners include: Pet Valu, Chico, Bosley’s and Paulmac’s Pets.

Investment thesis

• 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 Walmart at 12 per cent.
• Defensive business. Consumable (e.g. food and treats) represent approximately 70 per cent of its business.
• Same-store sales growth. Between 2016 and 2022, same-store sales growth averaged 12 per cent, ranging from 7 per cent (in 2018) to 18 per cent (in 2021). For fiscal 2023, management targets same-store sales growth of between 7 per cent and 10 per cent.
• Supply chain investments. A new distribution centre in the Greater Toronto Area is expected to ramp-up in the third quarter and serve central and eastern Canada. This new DC will increase capacity and improve profitability, reducing the use of third party storage and increasing automation.
• Healthy balance sheet to fund its growth. At quarter-end, the leverage ratio stood at 1.8 times.
• Lowest valuation since publicly traded. Currently trading at trough multiples.
• Potential key risks to consider: 1) earnings growth deceleration in 2023. Management targets earnings per share of between $1.60 and $1.66 in fiscal 2023, compared to $1.59 reported in fiscal 2022. This lack of material growth may keep buyers on the sidelines; 2) near-term negative currency impact from a declining Canadian dollar as 30 per cent of its purchases are denominated in U.S. dollars; and 3) economic weakness.

Quarterly earnings and outlook

Before the market opened on May 9, the company reported its first-quarter results.

System-wide sales, which includes sales from corporate, franchised stores and e-commerce sales, totaled $339.6-million, up 19 per cent year-over-year. Same-store sales growth was 9.4 per cent, driven by higher sales per basket (up 6 per cent), as well as higher traffic (up 3 per cent).

Revenue, which excludes franchised store sales, came in at $250.3-million, up 17 per cent year-over-year, beating the consensus estimate of $245-million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $48.8-million, up 4.3 per cent year-over-year, but fell short of the Street’s forecast of $51.4-million. The adjusted EBITDA margin was 19.5 per cent. Adjusted earnings per share came in at 32 cents, below the consensus estimate of 35 cents and down from 35 cents reported during the same period last year.

During the quarter, seven new stores were opened. That day, the share price declined nearly 5 per cent on high volume.

On the earnings call, president and chief executive officer Richard Maltsbarger highlighted the loyalty that pet owners exhibit for their brand purchases but noted that consumers are shifting to larger quantities where consumers can realize greater value. He said: “From a category perspective, growth continues to be driven primarily by consumables and services. Within consumables, premium food tiers once again led the pack, a clear indication of the resilient nature of devoted pet lovers within the Canadian pet industry. We are seeing more customers transition to larger bags and can sizes, partially driven by better economics per pound, but also due to industry-wide adjustments to bag and can volumes. In hardlines, which account for less than a quarter of our sales, growth remains positive, though has softened sequentially across many assortments.”

For 2023, management targets opening between 40 and 50 stores, bringing its store count up to between 784 and 794 stores. Same-store growth is expected to be between 7 and 10 per cent.

Revenue is anticipated to increase between 10 per cent and 13 per cent year-over-year to between $1.05-billion and $1.075-billion. Adjusted EBITDA is expected to rise between 7 per cent and 10 per cent to between $230-million and $237-million. Earnings per share is anticipated to increase by between 1 per cent and 4 per cent year-over-year to between $1.60 and $1.66.

Longer-term, management’s key objectives are: 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 10 cents per share of 40 cents per share yearly, equating to a current annualized yield of 1.25 per cent.

Analysts’ recommendations

The stock has six buy recommendations and one underweight recommendation (from ISS-EVA). In addition, two analysts are currently restricted on the stock.

The firms providing research coverage on the company are as follows in alphabetical order: Barclays, CIBC World Markets, Cormark Securities, Eight Capital, ISS-EVA, National Bank Financial, RBC Dominion Securities, Stifel Canada and TD Securities.

Financial forecasts

For fiscal 2023, the Street is forecasting revenue of $1.07-billion, EBITDA of $231-million and earnings per share of $1.62. For fiscal 2024, the consensus revenue, EBITDA and earnings per share estimates are $1.17-billion, $261-million and $1.89, respectively.

Forecasts have either held steady or been revised modestly.Four months ago, the consensus revenue estimates were $1.03-billion for fiscal 2023 and $1.11-billion in fiscal 2024. EBITDA estimates were $231-million for fiscal 2023 and $250-million for fiscal 2024. The consensus earnings per share estimates were $1.68 for fiscal 2023 and $1.90 for fiscal 2024.

Valuation

The stock is trading at trough levels.

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 10.9 times the 2024 consensus estimate, which is the lowest multiple since the stock has been publicly traded. On a price-to-earnings basis, the stock is trading at 16.9 times the 2024 consensus estimate, again, its lowest multiple since the stock was publicly listed. In 2021, the stock traded at a forward P/E multiple of over 30 times.

The average one-year target price is $45.17, implying the share price has 41 per cent upside potential over the next 12 months. Target prices range from a low of $41 (from Barclay’s Adrienne Yih) and $50 (from RBC’s Irene Nattel).

Insider transaction activity

Year-to-date, two management executives have reported trading activity in the public market.

On May 19, chief administrative officer Christine Martin-Bevilacqua sold 50,000 shares at an average price per share of $34.15, leaving 20,855 shares in this particular account. Proceed totaled over $1.7-million, not including trading fees.

On May 15-16, Mr. Maltsbarger exercised his options, receiving a total of 120,000 shares at an undisclosed price, and sold 120,000 shares at undisclosed prices. Between May 17-19, Mr. Maltsbarger exercised his options, receiving a total of 240,000 shares at an undisclosed price, and sold a total of 144,558 shares at an undisclosed price.

Chart watch

Given that the stock has a limited trading history, technical analysis is limited.

The stock began trading on the Toronto Stock Exchange in June 2021. The initial offering price was $20. Roughly 20 months later, the share price had more than doubled. On Feb. 24, 2023, the share price closed at a record high of $42.87.

Since then, the stock has come under tremendous pressure. Quarter-to-date, the share price is down 15 per cent, making it one of the worst performing stocks in the S&P/TSX Consumer Discretionary Index. Year-to-date, the share price is down 18 per cent.

The stock is now in 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 between $35 and $36, near its 50-day moving average (at $35.65). After that, there is a ceiling of resistance around $40. Looking at the downside, there is strong technical support around $30.

ESG Risk Rating

According to risk provider Sustainalytics, Pet Valu has an environmental, social and governance (ESG) risk score of 18.9 as of April 13, 2023. A risk score of between 10 and 20 reflects a “low risk” rating.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

This report should not be considered an investment recommendation.