What Stock Matches Apple’s One-Year Advance and Is All the Rage Down at the Dog Park?
PetSmart (PETM), the leading public pet supply and indulgence retailer, was added to the Standard & Poor’s 500 stock index in early October, replacing Sunoco, which was disappeared after its acquisition by Energy Transfer Partners.
At the close of its second quarter (end of August) PetSmart announced same store sales were up 7% from the second quarter of 2011. That’s three times the growth pace Wal-Mart (WMT) reported for its second quarter. Tightened wallets clearly doesn’t extend to our furry and feathered friends.
Even in recessions.
According to sales data from the American Pet Product Association, spending on pets sure looks like it belongs in the consumer staple sector, not consumer discretionary. The APPA says spending on pets increased more than 5% in 2009. This year’s estimate is for sales to increase by 5.5% to nearly $52.9 billion. That’s up from $29.5 billion a decade ago.
PetSmart has certainly surfed that wave.
The company has also delivered strong return on equity.
PetSmart is also increasingly returning cash to shareholders. Earlier this year the firm boosted its quarterly dividend by 18%. It has also completed $393 million of a $450 stock repurchase plan announced in June 2011 that runs through January of 2013. And earlier this year PetSmart initiated another repurchase plan for up to $525 million. If both blocks are completed, that’s nearly $1 billion in repurchases for a stock with a $7.4 billion market cap. Yet it’s not as if the firm is sitting on boatloads of cash; current cash and short-term investments clock in at about $375 million.
Boosting earnings-per-share through stock repurchases (it reduces the number of shares outstanding) could help tame PetSmart’s rising valuation. The stock has become progressively more expensive the past few years, based on PE ratio.
According to S&P Capital IQ, the current PE multiple for the S&P 500 is 14, with both the consumer staples and consumer discretionary sectors trading at a PE of about 17.
While index funds tracking the S&P 500 are required to add PetSmart to their portfolio, individual investors sniffing around the stock should make sure they are comfortable with that significant valuation premium.