Yahoo Finance This unloved UK stock could rise 120%, according to a City broker
One UK stock that seemed like a no-brainer buy until recently was CVS Group (LSE: CVSG).
As the operator of vet practices, diagnostic centres, an online retail business, and even pet crematoria, CVS was riding the coattails of a secular boom in all things pet-related.
Then in September the UK’s antitrust watchdog came along and, like a muddy Labrador jumping into a pristine pool, severely clouded the waters for CVS shareholders.
Specifically, the Competition and Markets Authority (CMA) announced it would look into the fees charged for veterinary services. “There has been a lot of consolidation in the vet industry in recent years, so now is the right time to take a look at how the market is working,” it said in a statement.
Indeed, there has been consolidation, and CVS has been behind a lot of it, snapping up numerous smaller vet practices. Unsurprisingly, investors took fright and the stock is down 48% since this announcement.
Now though, analysts at Berenberg Bank think the selling is overdone. On 21 May, the broker reiterated a 2,370p share price target. That’s 120% higher than the current price of 1,074p!
So, should I squirrel away some shares? Let’s take a look.
Tightening the leash on the vet sector
On 23 May, it was announced that the CMA will launch a full investigation into the UK’s £5bn vet market. This probe is expected to take around 18 months.
The watchdog said: “We have heard from people who are struggling to pay vet bills, potentially overpaying for medicines and don’t always know the best treatment options available to them.”
Of course, the big risk here is that this could affect CVS’s market position and growth potential. It could be made to cap prescription fees. In the worst-case scenario, it may be forced to divest certain assets.
Interestingly though, the share price rose 3% in response to this news. This suggests that most of the bad news might already be priced in to the stock.
Some things I like
From an investing perspective, there are three things that I like here.
First, a whopping 16m households across the UK have a pet. And owners will spend on their furry companions regardless of whether the economy is going to the dogs or not. It’s a resilient market.
Second, the company has been growing its profits rapidly, from £10.7m in 2018 to a forecast £67m in fiscal 2024 (which ends in June).
Finally, as things stand, CVS is trading at an attractive valuation. It has a forward price-to-earnings (P/E) ratio of just 11.5.
That’s a massive discount to its historical average and lower than rival Pets at Home (13.7).
Time to pounce?
I’m torn on whether this is a timely opportunity or one to avoid.
A couple of years from now, once the investigation is over, the stock might have doubled. Then again, the outcome might not be favourable.
In the meantime, there’s that 18-month wait, during which time the stock could drift lower.
Still, I’m hearing Warren Buffett’s timeless words in my head: “Be fearful when others are greedy and greedy when others are fearful.”
There’s an awful lot of fear around the stock today, so it’s on my watchlist while I weigh up what to do.
The post This unloved UK stock could rise 120%, according to a City broker appeared first on The Motley Fool UK.
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Pets At Home Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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