Down 14% today, should I buy the dip on this FTSE 250 growth stock?
It was a volatile morning (18 September) for the Pets at Home (LSE:PETS) stock, falling over 20% before recouping some of the losses later in the day. The FTSE 250 company’s hit the news headlines for all the wrong reasons. But when I see a dip of this magnitude, sometimes it can be an overreaction, representing a good value buy. Here’s my take.
Reasons for the drop
The business issued its second profit warning within just a few months. More specifically, it lowered its full-year underlying pre-tax profit guidance. Instead of the earlier estimate of about £110m-£120m, it now expects £90m-£100m for fiscal 2026.
To add to the problem, CEO Lyssa McGowan’s stepped down immediately. Non-executive chair Ian Burke will act as executive chair until a new permanent CEO is appointed.
Retail underperformance has been the key problem in recent months. While some parts of the business (digital sales, vet services) are doing okay, the retail segment’s lagged expectations. Demand for pet supplies is soft amid high inflation and tight budgets, and consumers are cutting back on non-essentials.
In terms of the share price reaction, it’s understandable to some extent. Lower profit means the earnings per share should drop. Therefore, the stock needs to decline to factor in the lower earnings. Furthermore, the CEO’s departure adds uncertainty. This means that some investors won’t want to hold the stock if they’re unsure about how things could pan out.
Trying to look beyond the noise
The revision lower in profit is about 20%, so a corresponding fall does make initial sense. The fact that it’s recovering somewhat indicates to me that investors are focusing on what the future could hold.
After all, some areas of the business are doing well. For example, regarding vet services, the update said “we are on track to deliver our planned 10 new practices in FY26, alongside 15 vet extensions and another year of profit progress”. So it’s clear that the business does have good areas it can focus more on.
Furthermore, although the profit downgrade isn’t ideal, the business remains profitable. If the revision had been indicating a loss, I think I’d be much more cautious. But it’ll still comfortably post a pre-tax profit for the full year. This means that cash flow shouldn’t be strained, and dividends could still be paid.
Maybe I’m too optimistic, but with the stock now down 37% over the last year, it’s starting to look interesting to me as a value play. The price-to-earnings ratio is still around 10, so it’s not massively undervalued, in my book. Risks remain, particularly with the uncertainty of leadership in the short run.
Therefore, I’m adding the stock to my watchlist. I’m cautious about buying now, but if this move keeps going, then I’ll look to invest in the coming weeks.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Pets At Home Group Plc. 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.
