Morgan Stanley upgraded Pets at Home to 'equal-weight' from 'underweight' on Friday following significant recent share price underperformance, but Berenberg cut the stock to 'buy' from 'hold'
The bank, which kept its price target on the stock at 125p, said that while it remains cautious about the company's longer-term financial prospects, the issues are now fairly reflected in the share price.

MS has had an 'underweight' rating on the stock since it initiated coverage shortly after the IPO in 2014, amid doubts about the sustainability of gross margins on the retail side of Pets' business, while more recently it highlighted that many of its vet joint ventures are struggling to reach profitability.

"Despite significant recent price investment, Pets at Home's Retail business still has a gross margin of more than 50%. We think this will prove difficult to maintain, given rising competition from discounters, supermarkets and online specialists."

The bank said its concerns on these issues remain, but they are now priced in as the shares have almost halved since the beginning of last year and are now down around 60% from their 2015 peak.

"Whilst earnings forecasts have fallen, the shares have de-rated significantly and now trade on a single-digit price-to-earnings multiple on consensus forecasts," Morgan Stanley said.

"We think gradual further earnings downgrades are likely in the medium term, but we do not envisage a big profit warning anytime soon. Nor do we see the shares de-rating much further."

Berenberg went the other way on Pets, downgrading it and slashing the price target to 140p from 230p.

The bank noted that since upgraded Pets back in August 2017, earnings estimates have stabilised. However, fresh questions have arisen around the company's JV veterinary model, weighing on the shares despite the improvement in underlying momentum.

"With the company having revealed the profitability of its vet business (as we believed, it is over one-third of forecast EBIT this year), we continue to believe the company looks good value on a sum-of-the-parts basis. However, increased loans to support its early-stage JV vet partners will weigh on free cash flow in the coming years, and we struggle to see where incremental positive sentiment will come from in the near term."

At 0945 BST, the shares were down 0.3% to 127.42p.

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