COMMENTARY | COLUMNISTS | BRENT WILSEY

Investors shouldn't sweat market pullback; PetSmart worth a look

The stock market overall seems to be pulling back somewhat and the Dow Jones Industrial Average has been in a range of 15,900 to 16,500 for months.

Don’t be worried by this or think that the market is going to drop 1,000 points. While it's always possible, it's not likely.

What is happening -- the large drop in many of the high-flyers like Amazon.com Inc. (Nasdaq: AMZN) and Twitter Inc. (Nasdaq: TWTR), just to name a couple -- is a good thing that shouldn’t be affecting true investors.

Amazon, Twitter and others like them may have hit a ceiling, and strong companies with good fundamentals may pull back a little but will continue their longer-term climb. Stay the course, don’t worry about the noise in Ukraine, global warming or whatever else may panic you. Businesses and the American economy are doing OK, and fundamentally strong businesses will do well going forward.

Last week, I received a request to look at PetSmart (Nasdaq: PETM). I looked at this company years ago and liked it back then, so I thought now might be a good time to revisit this pet supply company. PetSmart currently has 1,333 stores and employs 26,000 people. It is not a large company, but it also can't be considered a small company with a market cap of $6.7 billion. The stock currently trades around $68 per share and has a 52-week range of $62.12 to $77.32. As always, I’m happy to see it closer to the low than the high end.

At first glance, one might think the stock could be on the pricey side, trading at 16.8 times trailing earnings per share, which is based on earnings per share of $4.02. I would encourage investors to look forward to the January 2015 earnings per share of $4.45 and January 2016 EPS of $5.05. This tells me that investors are paying a fairly reasonable forward PE of 13.5.

Price-to-sales on a trailing 12 months came in at 0.97, above the industry average of 0.55. Price-to-book value was also higher at 6.4, versus 4.5. Lastly, price-to-cash flow is 10.5, which is slightly better than the industry of 11.20.

The company does pay a small dividend of 1.15 percent and uses only 17 percent of the earnings to pay out that dividend. I did notice that the company has grown that dividend 42 percent over the past five years, so maybe there is some hope for dividend increases in the near future.

Sales growth year-over-year, while not anything to write home about at 2.3 percent, was better than the industry at 1.6 percent. Earnings per share growth year-over-year does look better at 13.1 percent for the company, compared to the industry growth of 1.1 percent.

The company also has an attractive profit margin of 5.8 percent, almost double that of the industry average of 3.3 percent.

The balance sheet looks stable for PetSmart, with a current ratio of 1.7 -- far better than the industry average of 1.1. Debt-to-equity comes in at 47.04 for the company, which is below the industry debt-to-equity of 56.1.

PetSmart also gets a good return on its equity of 37.8 percent, versus the industry average of 19.9 percent.

The receivables turnover looks good for the company, turning over the receivables 95.5 times over the last 12 months while the industry average is only 40.5 times.

Inventory turnover is lower than the industry at 6.76 times for the trailing 12 months, but not by that much with the industry at 7.05.

With estimated earnings per share for January 2016 at $5.05 and using the 40-year average forward PE of 16.5, that would equate to a target sell price of $83.32. With the stock around $68 per share, that would leave a 23 percent potential gain.

In my opinion, that's not a bad gain for just under two years, but I prefer to have a potential gain of 30 percent or more. It should also be noted that for the last 90 days, the January 2016 estimate has stayed at $5.05.

I would also point out that PetSmart beat the estimates for the last four quarters and the company has a long term PEG ratio of only 1.17, which means investors aren’t paying that much for the future growth of the company.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.


Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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