“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.