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Petco Stock: Buy, Sell, or Hold in 2022?

One of the interesting side effects of the coronavirus pandemic is rising pet adoptions. Folks spending less time in offices with co-workers, less time out with friends, and generally more time in isolation desired the companionship a pet provides.

As a result, specialty retailer Petco (NASDAQ: WOOF) has been thriving since the pandemic's onset. Sales and profits at the company have surged. Let's look closer at this business that serves pets -- and their pet parents -- to determine if it's a buy, sell, or hold for 2022.

Image source: Getty Images.

Petco is riding the tailwind of increasing pet ownership

What a difference the pandemic has made for Petco. After just 1% year-over-year growth in the fourth-quarter of 2019 and first-quarter of 2020, revenue has surged higher at a double digit rate for six consecutive quarters -- rising by as much as 27% in the first quarter of 2021. Petco operates over 1,500 brick-and-mortar locations across the U.S., Mexico, and Puerto Rico as well as a fledgling online business and app.

Improving performance and a reduction in debt helped Petco increase net income to $52.7 million in its most recent quarter ended Oct. 30 -- up dramatically from the $3.4 million it reported in the year-ago period. At the same time, the company was able to sharply reduce its debt to $1.7 billion from $3.2 billion a year ago.

Petco's business seem well-positioned given that pet ownership is typically a long-term commitment. Folks who adopted and brought pets home during the pandemic could be pet parents for several years and perhaps a decade or more. That could help spending remain elevated at Petco during that time.

Petco stock is selling at a premium valuation

From a valuation perspective, it's more of a mixed picture. Petco is selling at a price-to-free cash flow of 41 and a price-to-earnings ratio of 39.6. In its brief history, these are near the lowest levels it has traded for as a profitable public company. So compared to its historical prices, Petco stock is relatively cheap right now.

However, comparing these same metrics to other brick-and-mortar retailers of similar size, Petco is the most expensive of the group by a considerable margin. In addition, the other retailers are generating much more in sales compared to Petco.

Petco's premium valuation might be justified by its double-digit revenue growth for six consecutive quarters. Still, the significant risk with that argument is that in the two quarters before the outbreak, revenue grew at only a 1% rate. So while overall revenue might remain at this higher level, growing by double digits may not be sustainable.

Weighing all the factors together, investors who already own Petco can feel good about holding onto their shares for 2022. But those looking to start accumulating shares might do best to wait for a pullback in the stock price or a couple of more quarters of continued excellent performance before beginning a position.

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Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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