Shares in Greencross Limited (ASX: GXL) have been topsy-turvy in recent months, soaring as high as $7.50 after a buoyant annual report reassured investors. That confidence went up in smoke just a few weeks later when CEO Jeffrey David resigned – a departure that investors were not forewarned about in the preceding annual report.
The value of Greencross shares subsequently dropped back below $6, and shares have bounced around the $6 mark ever since. Although today's prices are higher than when I bought shares, Greencross still looks cheap for a number of reasons.
Firstly, is the triple whammy of growth:
- The pet care sector is growing at roughly 4% per annum, which is a decent tailwind
- Greencross is expanding its footprint to capture 20% (up from 6%) of this market currently
- Company research has shown that co-locating stores (vets, retailers and groomers) increased the amount customers spend at Greencross by between 2.2 and 5 times
Greencross also appears fairly cheap on the face of it, with shares down 20% for the year and a Price to Earnings (P/E) ratio of 19 times underlying profit, which is above the ASX average but not inordinately expensive.
A group of analysts polled by the Wall Street Journal found 7 of the 9 analysts polled indicated the company was a 'buy' or 'accumulate' with the remaining 2 advocating a hold. Price targets range from as low as $6.50 to as high as $9. Macquarie Wealth Management recently cut their price target to $7.50, while maintaining an 'outperform' recommendation on Greencross.
Certainly, Greencross shares look undervalued by any measure, and I believe prices below $7 are a good opportunity for investors while prices below $6 represent a great one.
As I have written before, I have the following concerns:
- Greencross is still spending more than it makes, relying on debt to fund the shortfall. The company believes it will be able to 'self-fund' its expansion from 2017
- It is uncertain to what extent a slowing Australian economy will impact pet spending. If the impact is significant I could rethink my investment
- The recent departure of the CEO created additional uncertainty about the management team
Importantly, the above risks may not come to affect the company in a significant way, which means that at today's prices, I consider Greencross a solid investment opportunity.
