Inside Wall Street: PetSmart Could Make You a Wise Investor

If you have a pet, chances are you know PetSmart (PETM) well enough. If not, you should at least be aware of its stock, which has outsmarted the market so far this year. Shares of the largest provider in North America of almost every product and services that pets need to live -- or luxuriate -- have skyrocketed 45% this year, to $27 from a 52-week low of $15 on Dec. 15, 2008.Because of that strong move, several analysts have put PetSmart on hold. And since their price targets have already been reached in less than a year, they've taken some profits.

That's understandable. "PetSmart has performed superbly and achieved our target, enhancing our portfolio's returns," says Mark Travis, president of Intrepid Capital Funds. Among the Street analysts who track the company, 12 rate it a hold, and eight recommend buying the stock, according to Bloomberg. None rates it a sell.

But those who have stayed bullish point out that despite a very challenging retail climate, PetSmart managed to produce better-than-expected quarterly results this year from its some 1,100 stores in the U.S. and Canada.

Millions and Millions of Pets

With the economy now inching to recovery mode, they expect PetSmart to do even better. The American Pet Products Association (APPA) estimates that U.S. spending on pets will rise to $45.4 billion, up some 165% since 2004. That's plenty of spending by about 71 million households that own pets. A recent APPA survey found Americans own about 88 million cats and 75 million dogs.

In the third quarter, the company, which provides pet foods and supplies, as well as such specialty services as pet training and grooming in stylish salons, day camps, overnight boarding and pet hotels, posted a 6% gain in profits as customers continued to spend on their pets in spite of the high level of joblessness.

PetSmart is "the best positioned specialty pet retailer when more discretionary spending resumes with the recovering economy," says analyst Joan Storms of Wedbush Securities. The company is executing very well, she notes, with more positive sales trends in hard goods. Some 90% of PetSmarts' sales come from its pet foods and supplies and sales of live pets. Only 10% come from its high-margin service operations. The company is working on boosting revenues from the service side of the business, says Storms, who rates PetSmart outperform.

Send Your Pup to Doggie Day Camp

Without doubt, what's buoying the PetSmart bulls is that sales of pet-related products and services continue to climb. "The overall market is growing due to favorable trends, such as rising pet ownership and greater expenditures per pet," says Michael Souers, analyst at Standard & Poor's.

Although he rates the stock a hold, Souers says he continues to favor PetSmart's longer-term growth potential because he believes the company's "high-margin pet services, such as grooming, doggie day camp and overnight boarding, will likely increase customer loyalty and drive strong margin expansion for years to come."

Analysts who are bullish on PetSmart have been pushing up their earnings estimates, but some of them see the numbers as still modest, particularly because of expectations that consumer spending is likely to ratchet up next year with the economic recovery.

"We believe our upwardly revised earnings-per-share estimates could still be conservative," says Daniel Hofkin of investment firm William Blair, who rates the stock outperform. His projections for 2010 are $1.55 a share and for 2011 $1.73, up from 2009's (ended Jan. 30), $1.52.

Big-Money Interest

Investors who own pets are, of course, logical investors in PetSmart. But the list of stakeholders includes some large institutional investors, as well, such as Longview Asset Management, which owns 5.6% of the stock and Barclays Global Investor, which holds a 4.6%.interest.

Clearly, plenty of smart money is convinced PetSmart will keep them out of the doghouse.

Meet Gene Marcial at the World Money Show Orlando, Florida, Feb. 3-6, 2010 at The Gaylord Palms Resort.
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