Inside Wall Street: PetSmart deserves a pat

The largest US retailer of specialty pet products is on track to exceed last year's 27% earnings jump.

By Gene Marcial Mar 5, 2012 2:21PM

Image: Dog (© Alley Cat Productions/Brand X/Corbis)

If you like to cuddle your dog or cat, you know the happiness pet ownership can bring. Owners of PetSmart (PETM) have reason to be happy, too.

The stock has been a phenomenal sprinter. Steadily rising since hitting a low of $13 in 2008, PetSmart has more than quadrupled, currently trading at close to $56 a share. The huge rise prompted some earlier investors to take profits, but that's OK. Most of them are now waiting for the stock to dip so they can get back in again.

That's usually not a bad idea for shorter-term investors who want to take some profits. But in the case of PetSmart, they may have to be patient, because the stock could just continue to trek upward. PetSmart's business is going well, and the outlook remains robust.

Overall sales of pet-related products and services are constantly increasing for a number of reasons, including expanding pet ownership and increasing spending on pets. Take a look at these numbers: Between 1994 and 2010, spending on pets increased more than 180%, to $47.7 billion, according to the American Pet Products Association. Spending is forecast to continue rising by about 5% to 6% a year over the next five years. About 71 million U.S. households own pets, including 94 million cats and 78 million dogs.

PetSmart posted industry-leading revenue of $5.7 billion last year. The company had 1,187 stores in North America as of Jan. 31, 2011, and continues to open new ones, including 38 last year. PetSmart's goal is to operate 1,800 stores. So far, it says it's on track to meet that target.

"We continue to favor the company's medium-term growth potential," says Michael Souers of S&P Capital IQ. "We think its high-margin services business -- such as grooming, Doggie Day camp, and overnight boarding service PetsHotel -- will likely increase customer loyalty and drive strong margin expansion for years to come."

Souers has boosted his 12-month target to $62 since the stock met his earlier price target of $55 a share. He increased his earnings estimate for fiscal 2013 (ending Jan. 31) by 10 cents a share to $3.14 and set a forecast for 2014 of $3.46. Last year, PetSmart's earnings rose 27% to $2.55 a share. "We see continued sales strength in fiscal 2013," he says.

One big reason for PetSmart's increasing sales is the allure of its product lineup and dependable services -- along with its relatively low prices.

"The retailer's mix of brand-name and private-label natural/health pet foods and line of GNC vitamins and supplements have been getting a thumbs-up from pet parents," says J. Susan Ferrara of Value Line, an independent investment research outfit.

Ferrara notes that a new line of Martha Stewart cat care products has drawn a positive reaction, too. She also points out that PetSmart is scheduled to roll out Toys "R" Us cat care and toys this spring, followed by a collection of dog accessories by rock star Bret Michaels in summer.

Value Line ranks PetSmart as No. 1 in timeliness,  the highest category in its stock-ranking system, which it attributes to the company's price and earnings momentum. And PetSmart's dividend yield of 1.3% is a treat, Ferrara says.

For investors looking for a growth stock with a track record of steadily expanding sales and earnings, with a decent dividend kicker, PetSmart should be a top pick.

Gene Marcial wrote the Inside Wall Street column for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book Seven Commandments of Stock Investing, published by FT Press.



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