Is it time to buy Greencross Limited shares?

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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.

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Motley Fool contributor Sean O'Neill owns shares of Greencross Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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