PetSmart: A ‘Best in Show’ Stock Buy

An interesting fact about the most recent recession is that while it hit consumer spending on a lot of fronts, it didn’t put a dent on demand pet goods. In fact, pet owners have spent more and more on their furry friends for each of the past 10 years! And with over 70 million homes in the U.S. that own a pet, this is great news for companies like PetSmart (NASDAQ:PETM). Let’s review this company and see whether it is truly the top dog of Specialty Retail.

Company Overview

From fish and aquariums to puppies and veterinarian services, you can find it all at PetSmart. The company is the largest retailer of pet food and supplies in a $40 billion industry.

Industry Breakdown

The Specialty Retail industry is made up of 126 companies, the largest player being Britain’s Inchape Plc (LON:INCH); PetSmart ranks at no. 18 in terms of market capitalization. PetSmart also stands out in terms of its 0.9%, which is ninth in the industry, and its Price/Earnings to Growth ratio, which is tenth in the industry.

PetSmart’s long-term growth rate, return on equity and earnings growth all fall in the top quartile, but its sales growth comes in right around the industry average. PetSmart’s main competitors are Target (NYSE:TGT) and Wal-Mart (NYSE:WMT). Of these three companies PetSmart has the strongest fundamental stats.

Dividend Buzz

Before the opening bell on Monday, PetSmart announced that its board of directors has approved a new share repurchase program. Starting the end of July, the company has until January 2014 to buy back $525 million of its stock. Additionally, the company also increased shareholder value by boosting its quarterly dividend by 18% to 16.5 cents per share. Shareholders of record on July 27 will receive this next payment on August 10.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This stock has remained firmly in buy territory over the past 12 months. Although this is mostly thanks to consistently strong buying pressure, this company is backed by great fundamentals.

PetSmart Inc. is top notch in terms of return on equity and also scores well in terms of operating margin growth, earnings growth, its track record of beating earnings estimates and cash flow. In fact, the only area of improvement for PetSmart is its sales growth, which is currently C-rated. PETM receives a B for its Fundamental Grade and an A for its Quantitative Grade (which indicates the current level of buying pressure).

Bottom Line

As of this posting onJune 19, I consider PETM an A-rated buy.

Recommendation: A-Rated Buy

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