PETS reveals no economic moat, but recent bad news has produced an opportunity

Last trading  $23.51	Fair Value Range $30 to $34	Uncertainty Medium	Enterprise Value $394m
Consider Buy $18	Economic Moat Weak to None	Stewardship Rating Standard	Market Cap $487m

Recommendation

At $23.50, PETS is undervalued and we recommend a BUY.

A combination of short-term guidance misfires and PetSmart’s acquisition of Chewy has caused market-wide panic, float short % to skyrocket, and PETS’ market cap to halve over the past 9 months.
A price correction was deserved but the market has overreacted. PETS’ price-implied-expectations (discussed later in detail) indicate a contraction in sales growth and margins that defy rationality.

Our analysis indicates a fair value range of $30 to $34, with an expected return of 4.5% to 7.2% CAGR over the next five years.
A target price of $16 to $18 would upgrade this recommendation to STRONG BUY.

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