Retail Stocks

Petsmart Inc. Quarterly Valuation – July 2014 $PETM

header-logo_no_tagBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Petsmart Inc. (PETM) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): PetSmart, Inc. (PetSmart) is a specialty provider of pet products and services in North America. The Company has identified a group of pet owners it call pet parents, who are committed to their pets and consider their pets to be members of the family. As of February 2, 2014, it opened 55 net new stores, which includes twelve microstores, and it operates 1,333 stores in the United States, Puerto Rico, and Canada. The Company offers approximately 11,000 items in its stores and 9,000 additional items on PetSmart.com, including brand names, as well as a selection of brands across a range of product categories. The Company’s PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision by caregivers who are PetSmart trained to provide personalized pet care, temperature-controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of February 2, 2014, it operates 199 PetsHotels.
PETM Chart

PETM data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $69.92
MG Value $141.40
MG Opinion Undervalued
Value Based on 3% Growth $53.25
Value Based on 0% Growth $31.22
Market Implied Growth Rate 5.27%
Net Current Asset Value (NCAV) -$1.14
PEmg 19.04
Current Ratio 1.64
PB Ratio 6.47

Balance Sheet – 5/4/2014

Current Assets $1,312,700,000
Current Liabilities $800,200,000
Total Debt $450,500,000
Total Assets $2,497,100,000
Intangible Assets $41,500,000
Total Liabilities $1,425,700,000
Outstanding Shares 99,200,000

Earnings Per Share

2015 (estimate) $4.25
2014 $4.02
2013 $3.55
2012 $2.55
2011 $2.01
2010 $1.59
2009 $1.52
2008 $1.95
2007 $1.33
2006 $1.25
2005 $1.14

Earnings Per Share – ModernGraham

2015 (estimate) $3.67
2014 $3.17
2013 $2.58
2012 $2.04
2011 $1.75
2010 $1.59

Dividend History

PETM Dividend Chart

PETM Dividend data by YCharts

Conclusion:

Petsmart qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the low current ratio and the high PB ratio. The Enterprising Investor has no issues presently as the company passes all of the investor type’s requirements. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.75 in 2011 to an estimated $3.67 for 2015. This level of demonstrated growth is greater than the market’s implied estimate of 5.27% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above than the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Petsmart Inc. (PETM)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Petsmart Inc. (PETM) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia or the company website for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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