There is little doubt Australians love their pets and this relationship is expected to grow even stronger as more people treat their pets like family. One company that is looking to take advantage of this trend is Greencross Limited (ASX: GXL). It is Australia's leading provider of specialist veterinary services and owns retail outlets Petbarn and City Farmers.
Greencross currently controls around 8% of the pet market with the aim of increasing this to 20%. With the market growing at around 4% per annum, the sector fundamentals are attractive and should provide Greencross with opportunities for growth organically and through acquisition.
Much of the previous growth Greencross has enjoyed has been attributed to its 'roll up' strategy. The company looks to acquire complementary businesses at an attractive price that can be integrated into its current business model. While this strategy has been successful in the past, some are questioning whether this is a sustainable strategy in the future and that has driven the share price down.
The share price has continued to be under pressure since an update to the market in May. Greencross revised underlying earnings growth to between 40%-46% as a result of several unexpected factors. The most concerning is the impact of the slowing Western Australia economy. WA makes up 15% of its store network and any further slowing will impact the ability of the company to meet its guidance. Severe weather conditions in Queensland and New South Wales have also affected trading as well as causing supply chain disruptions, which have now been rectified. On the positive side, the company has maintained its like-for-like sales within the target range despite those factors.
These short-term headwinds and concern about its "roll up" strategy has seen the share price fall from a high of $10.78 to a recent low of $6.14. With a historical growth rate of over 25% per year since 2011, Greencross has a history of strong financial performance and accordingly has been priced for growth. It is currently trading on a forward price-to-earnings ratio of around 19 times and a growing dividend yield of around 2.8%. The fundamentals for Greencross are still very strong and the recent fall may provide long-term investors with a good entry point.
Greencross is still rolling out new stores and acquiring clinics while integrating recent acquisitions. The management team has shown it has expertise in sourcing acquisitions and with a fragmented market, the company still has the ability to consolidate the market further. The key to its future success will be ensuring it does not pay a premium for these acquisitions.
Foolish takeaway
Greencross operates in a market that is growing faster than the broader economy and has a strong competitive position within the market. It is these fundamentals that should see Greencross deliver market-beating results over the long term. I think Greencross is a buy at current prices.
