PetSmart, Inc. (NASDAQ:PETM)

CAPS Rating: 5 out of 5

The Company is a provider of products, services and solutions for the lifetime needs of pets.


Player Avatar TMF1000 (99.71) Submitted: 12/3/2012 10:10:42 PM : Outperform Start Price: $15.44 PETM Score: +267.24

I placed PETM on my caps on 11/20/08 at $15.78, excluding dividends. I wanted to note it. I will be keeping them on my CAPS because believe they will steadily beat the S&P500 for many years to come.

I wrote my page 12 post on PETM on 12/10/2011. The price of the stock was $49.24 and the PE ratio was 20.43. Today the price is $69.69 or 41.5% higher, but the PE ratio is only 21.71 or about 6.3% higher. The price would have to fall to $65.58 to match the PE on 12/10/2011. So although the price is moving up very well, the PE isn’t, so the value range is creating a significantly higher price range which is always good for investors.

The Company has improved its balance sheet even though they now pay a $0.66 per share dividend a year and repurchased $453 million worth of their common stock. TTM cash flow was $480.93 or $4.40 per share up from $458.6 million or $4.06 per share last year. This gives them a cash flow yield of 6.3%.

In 2007, melamine-contaminated dog and cat food from China caused the death of many pets. That event accelerated the trend toward the purchase of premium and natural pet foods. PetSmart is doing a great job of exploiting that trend. They also have about 43.1% of the Pet industry market. Petco has about 20.7% of the market.

The big potential growth driver for PetSmart is the decline of the over 13,000 pet shops that are independently owned in the U.S. The number of small pet shops is growing smaller each year. PetSmart buying power is much larger than those companies which give them a big advantage. I believe PetSmart will benefit from the contraction of the number of small pet shops for many years to come.

I don’t think PetSmart will grow rapidly, but they should give investors a steady return and steady growth. They generate huge streams of cash flow on existing stores, so they can pay a larger dividend and/or keep buying back shares. I believe, they will easily beat the S&P500 over the next ten years.

Back on October 4, 2011, the Dow bottomed at 10,362.26. During that period PETM PE dropped to 16.8. For the stock to trade at a PE of 16.8 today, the stock would have to drop to $53.93. Considering the fear levels prevalent when the Dow dropped last year, I would think the PE of 16.8 would be a really good bargain target price. However, there is no guarantee the stock price will go that low without some major help from the Dow. Their long-term prospects look very good.

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