PetSmart: Smart Pick for Value

04/24/2014 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Our latest featured value stock provides top-quality pet products and services in North America; in 2013, the company's 1,333 stores produced an industry-leading $7.0 billion in revenue, writes 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.

Its broad product assortment is complemented by a selection of value-added pet services, including grooming, pet training, boarding, and day camp.

In addition, 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.

PetSmart operates 199 PetsHotels within its retail stores, and expects to expand this concept. The Doggie Day-Camp concept is available at all PetsHotel locations.

I expect sales to advance 6% during the 12 months ending April 30, 2015, while EPS will climb 12% to 4.66.

Babyboomers are buying more pets to provide companionship in retirement and are spending larger amounts of money to pamper their pets.

PETM shares are reasonably valued at 16.8 times current EPS with a dividend yield of 1.1%. Quarterly dividends have been paid since 2003 and were raised 0.03 to 0.195 recently.

The company operates in a recession-resistant industry and will therefore produce steady growth in future years. I expect PETM to reach my minimum sell price target of $84.27 within 12 months.

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