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Why Greencross shares surged 32% in 4 days

The Roman philosopher Seneca once said, “Luck is what happens when preparation meets opportunity”.

For stocks, the preparation is in identifying growing market sectors and gaining an understanding of better companies therein. That understanding prevents panic selling when a sudden drop in the share price occurs. Often during a period of uncertainty, investors may turn to charts as a supplementary tool to determine an appropriate level at which to acquire additional holdings.

After the announcement to merge with Mammoth Pet Holdings, the shares of veterinary services company Greencross (ASX: GXL) fell heavily. A cursory glance at charting levels indicated support at $5.50. An intraday low of $5.61 turned into a 32% gain over four trading days upon reaching an all time high of $7.40.

While a short-term trading opportunity, the main intention is to acquire stock for the medium to long term at an opportunistic level. The merger will create Australia’s largest integrated consumer facing pet care company. In addition to estimated EPS growth of 30% and the prospect of increasing dividends, Greencross is also considered a defensive stock. Loyal pet owners are likely to continue spending even during economic downturns.

Broker Canaccord Genuity forecasts that the merged business will be internally funding expansion initiatives from FY2016, in the absence of a major acquisition. Mammoth has secured 4% of the $5 billion pet care market while Greencross has a 5% share of the $2 billion professional services market. The merged group is targeting a longer term market share of 20% of the two highly fragmented markets.

Upside will be derived from significant cross sell opportunities from leveraging established customer bases within both groups. Greencross will be able to access Mammoth Pet Holdings’ 1.1 million member “Friends for Life” loyalty program, which it can use to market its veterinary services. In turn, Greencross already has 20,000 ‘Healthy Pet Plus’ subscription members who pay for basic coverage on a monthly or annual basis to get a number of free checkups and discounts off other services.

Additional comfort may be derived from similar successful business models overseas, one of which is PetSmart (Nasdaq: PETM), the largest pet food and supplies company in America. It’s share price has risen 260% over the last five years.

Foolish takeaway

Greencross had planned growth via consistent acquisitions of new veterinary practices and veterinary hospitals. Previously described as a roll-up, additional companies of this genre include fellow healthcare companies Primary Healthcare (ASX: PRY) and 1300 Smiles (ASX: ONT) as well as insurance company Austbrokers (ASX: AUB). These companies each have their positive attributes but are less diversified.

The diversification and synergies derived from the yet to be approved merger make this Fool even more comfortable with Greencross as a medium to long-term investment.

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Motley Fool contributor Mark Woodruff owns shares in Greencross.

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