Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – December 2014.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Petsmart Inc. (PETM)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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 Companyâ€™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.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$53.74|
|Value Based on 0% Growth||$31.50|
|Market Implied Growth Rate||6.75%|
|Net Current Asset Value (NCAV)||-$0.81|
Balance Sheet – OctoberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Petsmart Inc.Â is suitable for the Enterprising Investor but not the more conservative Defensive Investor. Â The Defensive InvestorÂ is concerned with the low current ratio, along with the high PEmg and PB ratios. The Enterprising InvestorÂ has no initial concerns. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. Â As for a valuation,Â the company appears to be undervaluedÂ after growingÂ its EPSmg (normalized earnings) from $1.75 in 2011 to an estimated $3.71 for 2015. Â This level of demonstrated growthÂ is greater than the market’s implied estimate of 6.75%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the price.
Be sure to check out previous ModernGraham valuations of Petsmart Inc. (PETM)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Petsmart Inc. (PETM)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Petsmart Inc. (PETM)Â orÂ 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. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.