Pet Valu is a buy, Beacon Securities says

Beacon Securities analyst Doug Cooper likes what he sees from Pet Valu Holdings (Pet Valu Holdings Stock Quote, Chart, News, Analytics, Financials TSX:PET).

In a research update to clients February 27, Cooper initiated coverage of the PET with a “Buy” rating and one-year price target of $42.50, implying a return of 38 per cent at the time of publication.

Cooper says there is a generational shift underway with regards to the acceptance of pets.

“While dogs have been domesticated for over 25,000 years, never in history have they, and pets in general, been more accepted as part of the family,” the analyst argued. “Today, especially for the Millennial generation, pets are treated like their own children with high quality food, treats, “play dates” and medical procedures. We believe this sociological change, driven by the largest cohort in North America, will provide sustainable growth for the $12.8 billion Canadian pet market, which has experienced a 17-year CAGR of 6.9% versus GDP growth of 3.6%. In addition to driving overall industry growth, we believe the particulars of the average Millennials’ life are congruent with Pet Valu’s neighborhood store strategy. In particular, Millennials are more likely to live downtown in a condo than prior generations, less likely to own a car and less likely to have a family. If they live in a condo, have no children and do not drive, what do they do? They own a pet. In fact, Millennials account for 33% of the pet-owning population despite being only 20% of the total population. The neighborhood stores of Pet Valu provide these consumers a local destination and a strong community foundation, which is important to their values. With 766 locations (as of Q3/FY23), 74% of Canadians live within 5km of a Pet Valu store.”

Cooper thinks PET will generate EBITDA of $231.9-million on revenue of $1.06-billion in fiscal 2023. He expects those numbers will improve to EBITDA of $256.8-million on a topline of $1.14-billion the following year.

“We believe PET’s profitable growth is sustainable for three primary reasons: it is by far the #1 pet retailer in the country with the spread between it and others expanding; its franchise model creates a large and captured market and finally its valuation that is still a material discount to CHWY (43% discount) as well as a material discount to other franchise retailers (a 54% discount to Domino’s Pizza, DPZ–US, Not Rated) and finally, a 44% discount to other leading Canadian retailers such as Dollarama (DOL–T, Not Rated). We therefore initiate coverage of Pet Valu with a Buy recommendation and $42.50 target based on 23x our FY25 EPS forecast of $1.85 as well as 12x our FY25 EBITDA forecast of $280 million, he added.