Investors in Greencross Limited (ASX: GXL) had to endure a difficult 12 months with the share price underperforming the S&P/ASX 200 (ASX:XJO) (Index:^AXJO) by more than 27%.
Long-suffering investors (including myself) finally received some relief when the company announced its full year results one week ago. Although the share price has given up some of its gains over the past three trading sessions, the shares are still up by around 15% and in my opinion still offer pretty good value for long-term investors.
Here are some highlights from Greencross' results that make me think there could be more gains to come:
- Earnings per share (EPS) increased by 43% – From a shareholder's point of view, EPS growth is one of the most important factors to consider when considering an investment and this is what will ultimately drive the share price higher or lower over the long term. Considering all of the recent negativity surrounding Greencross' operating model, I'm sure there are many investors who would be happy with a 43% increase in EPS no matter how it was achieved.
- Impressive Gross Margins – Greencross is operating on a gross margin of 55.3% and this actually increased from the previous year. The benefits of larger scale and cheaper product sourcing are helping Greencross to maintain its margins in the retail sector, while more specialised procedures in the veterinary business are helping to grow margins there.
- EBITDA margins are increasing – Although revenues can be easily boosted by acquisitions, EBITDA margin growth is more difficult to achieve. Pleasingly for Greencross, EBITDA margins have increased from 12.2% in FY14 to 13.5% in FY15. The majority of this margin improvement has resulted from the infamous notion of 'synergies'. Although many companies promote synergies when acquiring new businesses, they can be hard to achieve and even harder to maintain. There is no doubt Greencross should be able to extract more gains as the company grows further.
- Like-for-like sales are increasing – Greencross achieved a 6.2% increase in like-for-like sales across the whole group in FY15. The retail and veterinary businesses both generated organic growth and this shows that the company is growing even without having to acquire more businesses. This should ease some of the concerns from some analysts who believe Greencross relies solely on acquisitions to boost earnings. Interestingly, the company's New Zealand operations showed like-for-like growth of 8% in FY15 and this has continued into FY16 with a trading update showing a 9.3% increase in the first five weeks.
- Greencross is operating in a growing market. The veterinary and pet product market is growing at around 4% each year and Greencross is successfully gaining a larger slice of this growing market. Greencross has a stated aim of 20% market share and this is a realistic target considering the veterinary services market is especially fragmented.
- Growth outlook is positive. Although Greencross has not provided a specific growth forecast for FY16, it is already showing positive signs for the year ahead. The first five weeks of FY16 have already produced revenue growth of 19%, with like for like sales growth of 6.2%. Greencross is on track to open 20 new retail stores in FY16 in addition to a number of a new veterinary clinics.
Foolish takeaway
Based on FY15's EPS of 34.3, Greencross is trading on a price-to-earnings ratio of around 20. Considering earnings growth is likely to be in the double digits for FY16, investors could do far worse than consider an investment in Greencross.
Although the pet sector is growing rapidly, The Motley Fool has identified two small cap stocks with even better growth potential!
