PetSmart: Toys, Daycare, and Vets

02/04/2014 8:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

One of our latest value recommendations is a firm that provides top-quality pet products and services in North America; this recession-resistant industry should produce steady growth in future years, suggests J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

PetSmart (PETM) carries a broad selection of high-quality pet supplies at everyday low prices. Stores offer 10,000 items, including nationally recognized brand names, as well as an extensive selection of private brands.

In 2013, its 1,289 stores produced an industry-leading $7.0 billion in revenue. Its broad product assortment is complemented by a selection of value-added pet services; virtually all of its stores offer complete pet training services and feature pet styling salons that provide high-quality grooming services.

PetSmart emphasizes premium dog and cat foods, many of which are not available at supermarkets, warehouse clubs, or mass merchandisers. The company also offers its own brands in supermarkets and pet stores.

PetSmart offers full-service veterinary hospitals in 816 of its stores. Medical Management International, an operator of veterinary hospitals, manages most of PetSmart's hospitals under the name “Banfield, The Pet Hospital.”

PetsHotels provide boarding for dogs and cats, 24-hour supervision, an on-call veterinarian, temperature-controlled rooms and suites, daily specialty treats, and play time, as well as day camp for dogs.

The company operates 196 PetsHotels within its retail stores, and expects to expand this concept. The Doggie Day Camp concept is available at all PetsHotel locations.

The company operates in a recession-resistant industry and will therefore produce steady growth in future years. Baby-boomers are buying more pets to provide companionship in retirement and are spending larger amounts of money to pamper them.

PETM is reasonably valued at 16.3 times current EPS with a dividend yield of 1.2%. Quarterly dividends have been paid since 2003, and were raised $0.03 to $0.195 recently. I expect the stock to reach my minimum selling price target of $81.24 within one to two years.

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