The share price of Greencross Limited (ASX: GXL) has fallen by nearly 19% over the past month – a significant under-performance compared to the broader market which has declined by less than 1% over the same period.
Interestingly, the company has not released any market sensitive information during this period or announced any changes to its expectations for the year ahead. In fact, the company's most recent trading update that was provided at its AGM in October was quite positive and confirmed the business is on track to deliver another strong year of earnings growth.
Investors will, without a doubt, be concerned about the recent weakness in the share price and the increasing number of short positions being taken in the stock. More than 12% of Greencross' issued stock is currently held in short positions and this has been increasing steadily since May of this year. The impact short sellers can have on distressed businesses has been clear for all investors to see in stocks like Myer Holdings Ltd (ASX: MYR) and Slater & Gordon Limited (ASX: SGH), and this will leave many investors apprehensive about investing in Greencross.
While this may be one of the contributing factors to the recent weakness in the share price, I believe now may be a pretty good entry point for investors to start accumulating shares with the share share price hovering around $5. Here is why:
1. Strong like-for-like sales – FY16 first quarter total group like-for-like sales increased by 6% and this was achieved despite weakness in the Western Australian market. Greencross has been generating above average comparable sales growth in New Zealand and this trend has continued in the first quarter as well. To put this level of comparable growth into perspective, it is important to compare it to other retailers – for example, discretionary retailer JB Hi-Fi Limited (ASX: JBH) produced like-for-like sales growth of 3.7% in the first quarter of FY16, while non-discretionary supermarket giant Coles comparable sales increased by 3.6%.
2. Growing market – The veterinary and animal care market has been one sector of the economy that has been growing at an above average rate. Greencross' addressable market in Australia and New Zealand is estimated to be approaching $9 billion and growing at around 4% per year. Importantly, Greencross has been successful in growing its piece of the expanding market and this trend is unlikely to change in the short term.
3. Unique customer offering – Unlike standalone pet stores or veterinary clinics, Greencross' business model is now being directed towards an integrated customer experience. What this means is that customers can shop for all of their animal needs (such as food and toys) and at the same time are offered veterinary care, grooming and speciality medical services in one place. This leads to a much higher average spend by customers when compared to standalone stores and provides more efficient cross-referrals for additional services.
4. Further expansion in FY16 – Greencross remains on track in FY16 to open 20 new retail stores and establish 12 new veterinary clinics. In addition to this, the company expects to make a number of acquisitions that can be integrated into the existing network. Although there has been a great deal of negative commentary towards the 'roll up' model Greencross has used for expansion, it is important to note that a significant proportion of its earnings growth in FY16 will come organically rather than through acquisitions.
5. Attractive Valuation – With the share price hovering at just above $5 per share and assuming underlying earnings growth of 15% in FY16, the current forward price-to-earnings ratio is just 12.5. On top of this, investors should expect to receive a fully franked dividend yield of close to 4%.
Foolish takeaway
Greencross is a company that is likely to grow its earnings above the market average over the next few years, but is trading at a discount to the market average – a situation that I think is attractive!
Although the share price may remain under pressure in the short term, I believe the long term fundamentals of Greencross remain strong and investors should expect a much higher share price over the next few years.
