One cheap FTSE 250 growth stock stands out to me as an attractive investment right now.
This company is the specialist retailer Pets At Home (LSE: PETS). Not only is the business currently benefiting from a significant market tailwind, which is driving bottom and top-line expansion. But it is also in the middle of a strategic growth plan that should only enhance growth in the medium term.
The combination of these two tailwinds is the main reason why I would buy the stock for my portfolio.
Sector expertise
Over the past two years, there has been a jump in the UK pet population. The boom has materially increased the potential market for animal retailers like Pets. This is the significant market tailwind I mentioned above.
Management is trying to capitalise on this market growth with several initiatives. The company has launched a premium service called the Very Important Pet(s) (VIP) club. The number of active members increased 13% year-on-year for the 28 weeks to 7 October to 6.8m.
On top of this, the corporation is growing its Puppy and Kitten Club memberships. The number of club members increased 107% during the period to the beginning of October. According to the group’s latest press release, these members tend to spend around a third more than non-members.
As well as these initiatives, Pets is also building out its veterinary business. The number of pet care plan subscriptions across the group grew 45% year-on-year to over 1.4m. These subscriptions have the potential to generate £110m in annualised recurring customer revenue, according to management.
Thanks to these and other initiatives, for the 28 weeks to 7 October, group like-for-like revenue increased 28.6% compared to 2019 levels. Meanwhile, underlying profit increased 68.3%.
FTSE 250 growth stock
It does not look as if the company’s growth is going to slow down any time soon. Management believes that due to the increased size of the UK pet population, the firm has the potential to generate as much as £2.3bn per annum of revenue in the near term. Last year, revenue totalled £1.4bn.
That being said, there is no guarantee the corporation will hit management’s growth targets. Rising costs could impact the company’s profit margins, and inflation may push consumers elsewhere. In periods of rising inflation, consumers tend to trade down to less expensive products. This could have an impact on Pets.
Still, I would buy the FTSE 250 stock for my portfolio today considering its growth potential.
At the time of writing, shares in the specialist retailer are selling at a forward price-to-earnings (P/E) multiple of 22. That looks expensive, but it fails to take into account the group’s growth outlook. When I factor in management’s growth targets for the next few years, I believe the company has the potential to more than double profits in the medium term.
On this basis, I believe the stock is trading at a 2025 P/E in the low double-digits. That seems too cheap to me.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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