The stock market has been brutal lately. Pioneer of plant-based dairy alternatives Oatly group (NASDAQ: OTLY) and leader in animal welfare Petco Health and Wellness (NASDAQ: WOOF) have fallen by more than 60% year to date.
But these aren’t fly-by-night wannabes. The average Wall Street analyst expects substantial earnings growth over the next five years, and these companies are household names.
Leaving aside the frenetic nature of an inflation-flavored recession, a serene analysis can reveal underappreciated potential. Or maybe not, so let’s get started and find out.
Oatly: down 66% by 2023
Oat-based beverage expert Oatly hit the public stock market with a bang in 2021. The company’s initial public offering (IPO) brought high expectations. The company priced its stock at $17 per share, but the first day of trading started at $22.10. Share prices rose all the way to $28.73 in the first few weeks, followed by a brutal downward trend.
The Swedish company’s market capitalization, previously worth as much as $17 billion, has shrunk to $356 million.
And it’s not hard to understand why. Oatly’s operating results have a disturbing tendency to fall short of Wall Street’s consensus expectations, which are based on management’s objectives. In other words, Oatly’s financials often disappoint a well-informed investor. Additionally, Oatly is highly unprofitable and revenue growth has slowed in recent reports.
Is this the end of the line for the health-conscious food manufacturer? Not necessary. Management still expects “profitable growth” in 2024, despite challenging trends in previous reports. Distribution and marketing plans in the Asian market are changing as consumers there have surprised Oatly’s leadership with a cautious return to normal spending habits after the pandemic.
Oatly’s next earnings report will be released on Thursday, November 9. This update should give investors a better idea of how the company’s turnaround is playing out. In particular, I will keep a close eye on the Asian strategy shift and progress towards profitable operations.
And in the meantime, I think it’s fair to say that Oatly stock looks undervalued at the low of $0.60 per share. The stock is changing hands at 0.65 times the book value of the underlying company, which suggests that the average investor believes he would be better off if Oatly simply stopped doing business, liquidated all its assets and sent the resulting money to would direct the current shareholders.
I think that’s wrong. Thursday’s third-quarter report should provide more clues.
Petco: Down 64% in 2023
Founded in 1965, Petco is no puppy in the business world. However, it did not enter the stock market until January 2021, exposing Petco’s stock to more volatility. With a short history of detailed financial reports, it’s hard to know what to expect from these newcomers.
The company entered Wall Street in good shape, posting solid revenue and earnings growth in 2021. But gains slowed during the inflation crisis, with even pet lovers tightening their budgets on non-essential pet supplies.
On the plus side, Petco’s earnings and cash flows are positive even now, and its stalled revenue line has never moved lower. On the other hand, retail giant Walmart recently launched pet care and veterinary services in partnership with Petco rival PetIQ. If the first test locations meet Walmart’s expectations, a nationwide expansion could pose a serious threat to specialists like Petco.
Like Oatly, Petco’s stock trades at a huge discount to the company’s book value, with a price-to-book ratio of 0.4. In this case, the bears may have caught wind of a fundamental weakness. Petco needs new ideas at this point.
If stocks start to climb back out of this deep, dark hole of knee-jerk overreaction, I fear the normalization could be temporary. In the long run, big-box retailers and e-commerce companies could swallow up the entire pet care market. I’d rather watch Petco’s suffering stock from the sidelines until further notice.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Walmart. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.