Pet supply retailer PetSmart, Inc. (PETM) saw its ratings, price target, and earnings estimates boosted on Monday by analysts at Janney Montgomery Scott.
The Janney analyst said that "We are raising our 2009 EPS estimate to $1.43 (previously, $1.42), our 2010 EPS estimate goes to $1.57 (previously, $1.51) and our fair value estimate goes to $27 (previously $21). Our fair value estimate of $27 assumes approximately a 17x P/E multiple on our 2010 EPS estimate.
We have 6 reasons for our upgrade:
1) Cyclical issues are being perceived as secular
2)The impact of gross margin investment to drive traffic will subside through 2009 and disappear in 2010
3) The complexity of PETM's business model makes the company more defensive than perceived
4) Increased focus on the pet adoption program could drive comp and margin in 2010
5) Y/Y deflationary trends are moderating, which will benefit comp and gross profit dollars
6) Strong balance sheet and cash flow will drive share re-purchase and EPS growth.
PetSmart shares rose 47 cents, or +2.3%, in premarket trading Monday.
The Bottom Line
We had removed shares of PETM from our ''recommended'' list back last Sept.17, when the stock traded at $26.60. The company has a dividend yield of 1.92%, based on Friday's closing stock price of $20.84. The stock has technical support in the $19-$20 price area. If the shares can rebound from today’s drop, we see overhead resistance around the $24 price level. We would remain on the sidelines for now.
