Petsmart Inc. - Momentum - Zacks Rank Buy

Petsmart Inc. (PETM) recently hit a new 52-week high at $33.05 on solid full-year and fourth-quarter performances and an optimistic view from management.

Company Description

Petsmart, Inc., together with its subsidiaries, operates as a specialty provider of pet supplies, lodging and hospitals. At the end of 2009 the company operated 1,150 retail stores, 162 pet hotels and 740 pet hospitals. Petsmart was founded in 1986 and has a market cap of $3.98 billion.

In case anyone hasn't noticed, pet owners take the responsibility of owning a pet very seriously, frequently extending the same kind of first-tier entitlements to cats and dogs as the kids. This dynamic means that industry sales of pet foods, supplies and amenities is less discretionary than one might suspect. That dynamic showed up in early March when Petsmart released solid full-year and Q4 results.

Fourth-Quarter and Full-Year Results

Revenue for the quarter was up 1.5% from last year to $1.41 billion. Earnings came in at 61 cents, 9% ahead of the Zacks Consensus Estimate. The company has surprised in each of the last four quarters by an average of 12.5%.

For the year, sales were up 5.4% to $5.34 billion, with earnings coming in at $1.59, a 7 cents improvement from 2008. Same-store sales for the year were up 1.6%.

Petsmart moved to strengthen its business in 2009 by expanding and strengthening its balance sheet, opening 37 new stores and increasing its cash and equivalents by $230 million to $357 million. Petsmart plans to open between 40 and 42 stores in 2010. The company also returned some value to its shareholders with some purchased 7.1 million shares of its common stock for $165 million

Estimates

Management is cautiously optimistic about 2010, noting that much like many other businesses, its results will swing with the trajectory of the economy and the market. The analysts are looking for full-year earnings of $1.81, up 14 cents from two months ago. The next-year estimate is pegged at $2.04, a solid 13% growth projection.

Valuation

Even after the nice run, shares of PETM still look reasonably priced, trading with a forward P/E multiple of 17X, a slight premium to the overall market. The company's P/B multiple of 3.4X is above the industry average of 1.5X but better than the S&P's 5X. Petsmart's ROE of 17% is well ahead of the industry average of 10%.

The Chart

Shares of PETM have been surging since early March on the better than expected Q4 results. Look for support at $32 and the trend line higher on any sign of weakness. Take a look below.

Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Surprise Trader Service.

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