The rapidly expanding veterinary group CVS Group is offered at a rare discount to its typical premium valuation
The CVS Group (LSE:CVSG) is an illustration of how short-term uncertainty can produce alluring investment possibilities.
The Competition and Markets Authority's (CMA) investigation into the veterinary services industry has cast a shadow over the UK's largest listed veterinary services group for the last three years.
The shares fell to 13 times earnings, a ten-year low, as investors feared the regulator would impose remedies harsh enough to threaten the industry's profitability.
However, the company continued to compound profits at a favorable rate during that time. The company continued to grow internationally, revenue and profits continued to rise, and management continued to make investments in the company.
Watch the entire video here: Investors can now evaluate CVS Group based on its operational performance rather than regulatory uncertainty as the CMA's process is almost finished.
Few UK-listed companies can match CVS Group's consistent revenue and Ebitda growth since its 2007 listing, which helps to explain why the shares have historically fetched a premium valuation.
Veterinary care is one of the most resilient industries. When money is tight, people might put off buying a new car or remodeling their kitchen, but pet owners are unlikely to put off treating a sick pet. As a result, demand typically endures economic downturns.
Additionally, the long-term outlook for the industry is still positive. Thanks to advancements in veterinary medicine, procedures like MRI scans, orthopedic surgery, and oncology that were previously limited to specialized facilities are now more widely used.
The average amount spent on pets appears to be on the rise, especially when you consider the millions of puppies and kittens that were purchased during the COVID-19 pandemic and are now at the age where healthcare expenditures are increasing.
Over the course of more than 20 years, CVS Group has developed a company that will profit from these trends.
An integrated healthcare network with 500 locations, including general veterinary practices, specialty referral hospitals, diagnostic labs, and an online pharmacy, has developed from what began as a consolidator of separate veterinary practices.
Important competitive advantages are produced by that integrated model. Without the patient leaving the CVS Group network, a routine consultation may result in orthopedic surgery, cancer treatment, or specialized diagnostics.
The company improves utilization of its specialized facilities while keeping a larger portion of each pet's lifetime healthcare expenditures rather than sending work elsewhere. Additionally, it strengthens the benefits that scale already offers by making the network more appealing to clinicians and clients.
How CVS Group is strengthening customer loyalty.
Through The Healthy Pet Club, about 500,000 owners pay monthly subscriptions that cover routine health checks, parasite treatments, and vaccinations.
In addition to generating recurring income, the subscriptions encourage owners to see their veterinarian more frequently, boosting client loyalty and opening doors to more expensive diagnosis and care.
Additionally, CVS Group has made significant investments in hiring, educating, and retaining veterinary specialists.
Although a large portion of the industry is impacted by labor shortages, the firm's size allows it to offer more opportunities for clinical specialization and clearer career progression than independent practices.
Its competitive position should be strengthened and future growth should be supported.
The UK is not where the story ends. Australia's veterinary market is similar to that of the UK fifteen years ago; it is fragmented, privately held, and has a lot of room for consolidation.
Using the same methodical acquisition approach that worked well in the UK, CVS Group has acquired 57 practices with 80 million in annual sales in just three years.
The company's valuation has steadily decreased since the CMA announced its investigation, despite the underlying business continuing to expand.
The group has improved its market position, Australia has become a significant contributor to earnings, and sales have been steadily increasing.
The company was strengthened and future growth sources were diversified by management during this time. Even though CVS looks better now than it did at the start of the regulatory review, the share price still reflects a lot of the uncertainty.
A graph showing the share price of CVS Group from prior to 2022 to the beginning of 2026.
Share price in pence for CVS Group (LSE:CVSG).
It is challenging to defend that disparity in valuation. Companies that can consistently produce double-digit earnings growth, reinvest capital over extended periods of time, and generate robust cash flows seldom trade on just 13 times earnings. Investors were willing to value CVS Group at more than 20 times during a large portion of the previous ten years.
This premium wasn't just a sign of hope. Resilient end-market demand, consistent double-digit growth, robust cash generation, and frequent chances to reinvest capital at favorable returns were all combined by CVS Group.
These traits are mostly still present today. If anything, the opportunity to invest capital at favorable returns has increased as a result of the Australian expansion.
The veterinary industry continues to struggle with wage inflation, and future margins may be impacted by ongoing investments in clinicians. Australia still needs to show that it can sustainably replicate the UK company's success. Therefore, a rerating could take some time.
Nonetheless, the current valuation seems to fairly represent those risks. CVS's valuation was negatively impacted by the CMA investigation for the majority of the previous three years. The company continued to expand despite this.
Today's valuation might be a desirable starting point if the market starts to prioritize the latter over the former.
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