PetSmart Not Threatened by Walmart

“I was worried about Walmart coming into that [PetSmart] business, just the way people were worried Walmart would come into Best Buy’s. I was too, too, nervous. It looks to me, I got it wrong…Walmart did not even lay a glove on them.” — CNBC’s Mad Money 12/16/2009

On Wednesday’s Mad Money a caller asked Cramer about PetSmart (PETM) during his Lightening Round. Even as the stock is breaking new 52-week highs recently, Cramer issued a mea culpa on his former bearishness and is now bullish on the specialty pet retailer. In the past, Cramer had been scared by Walmart’s (WMT) possible expansion into the Pet retail space. Apparently, Walmart has not affected PetSmart’s business as the company has been one of the most consistent performers in all of retail. It just goes to show you consumers will continue to buy food, toys, and grooming services for their pets even when money gets tight.

As you can see from our historical ratings chart for PetSmart, we have felt this stock has been Undervalued for quite some time. We have observed the company slowly but surely continue to improve their fundamentals that underpin any business, namely sales and cash earnings. Perhaps, as the company has started to find some momentum, the market is starting to come around to the underlying value in the stock. Looking back at how the market has historically viewed PETM, the stock has normally traded at a price-to-cash earnings somewhere between 7.95x and 14.31x. Even at the latest 52-week high price that metric stands below the historical range at 7.59x. Similarly, the current price-to-sales per share stands at .63x, whereas the historical range is somewhat higher at .66x and 1.18x.

For a long term investor, we believe it is reasonable to assume that the market will begin to value PetSmart more in line with its previous valuations. That assumption would translate to the stock trading in the low-$30 territory before too long. We are reaffirming our Undervalued stance on Petsmart as it is one of the most consistent and best managed stocks in the retail space. We can understand why Cramer was so nervous by Walmart’s foray into pet products, but up until now it has had a minimal effect on PetSmart.

PetSmart Not Threatened by Walmart

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.