A Smart Investment to Make Today

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The happiest place on Earth for humans may be Disney World, but the happiest place on Earth for our pets is PetSmart (NASDAQ: PETM). I do not know whether it is the smell of the food, other dogs, or just the thrill of being in public, but my puppies go absolutely crazy on the walk through the parking lot and into the store. My male puppy barks his head off if he sees a neighbor dog outside of my home, but seeing a dog in this store is like he's found a long lost friend. PetSmart is not just a great place to take your pets, but it is also the perfect company to invest in! Let us take a deeper look into what makes this company worthy of consideration.

Store, Salon, and More

PetSmart's stores have all of the pet products you need, along with grooming, training, and adoption services. This is the most well-known part of the company, but they also operate PetsHotels and Doggie Day Camps. PetsHotels are overnight boarding facilities for people heading out on trips or who just cannot watch their dogs or cats for a period of time. There are 195 in-store facilities to date, and this number will continue to grow. These "hotels" are staffed by hand-picked professionals and hold the PetSmart name, giving the pet owners much more peace of mind than with other boarding facilities. Doggie Day Camp is like daycare for your dog, in which they will play with other dogs and PetSmart associates, all while under close supervision. Finally, there are Banfield Pet Hospitals located in 60% of stores. This pet hospital provides a full range of health care services as well as emergency services. PetSmart owns a 20.5% equity stake in the operator of these hospitals.

Internet Based Competition

PetMed Express (NASDAQ: PETS) is an internet-based pet supplies and information provider. They carry all major brands and hand select the healthiest products for your pets. They also have the largest network of veterinary pharmacists in the world, making them a great source for pet medications and advice. However, since they are internet-based, they are limited in the services they can provide. With a market cap just under $250 million, they are about 1/27th the size of PetSmart. Their earnings growth has slowed drastically, rising just 5% in 2012, and they are expected to grow under 1% in 2013. They have a high dividend of 4.6%, but this is not high enough to compare to the growth and dividend combination PetSmart offers. 

Amazon (NASDAQ: AMZN) is another internet-based retailer with a share of the pet supplies industry. You can buy just about anything imaginable on Amazon, including pet food, toys, and supplies. However, since they are internet-based like PetMed, they do not offer pet services. A major downside for Amazon is customer service relating to pet products. If a customer has questions or needs a product recommendation, they will need to contact someone with experience and expertise, which would result in a call to PetSmart, PetMed Express, or a local veterinarian. Also, PetSmart's prices are just as competitive as Amazon's, and if you order online from PetSmart you can elect to pick up your order at a local store for free. Amazon has the free "super-saver" shipping option, while PetSmart ships all orders over $49 for free. There are some cases where Amazon will win in the pricing war, but PetSmart has the advantage as of now.

Even with these strong competitors, PetSmart is still the leading online provider of pet supplies and information. As a brick and mortar store, PetSmart offers the personal interactions and services that most of us prefer when caring for our pets, and also gives our pets a place to go and feel welcome. I believe they will continue to have a stronghold in this industry.

Financial Growth

PetSmart reported third quarter earnings on Nov. 14, 2012. In this quarter, they recorded earnings per share of $0.75 compared to analyst expectations of $0.63. This is also a 50% increase year-over-year. In the quarter, comparable store sales increase 6.5%, total sales rose 9%, and sales of services grew 8%. Guidance for the full year was raised as management expects total sales to increase 10%-11% for the year. 

This pet superstore is expected to earn $3.93 in 2013 and $4.48 in 2014. This represents an 11.6% growth from 2012 and 14% growth from 2013. These growth rates are not as high as the 38% from 2011 to 2012, but with the rate they are going, I expect management to raise expectations in their next report. Fourth quarter earnings are to be released on March 6 and current expectations call for $1.21 per share, a 33% increase year-over-year. With that said, PetSmart has beaten earnings expectations for three straight quarters, so I predict another blowout. 

Current Pricing

PetSmart is trading at $62.75 during trading on Feb. 26, which is 13.74% below its 52 week high of $72.75. Their current price-to-earnings ratio is below the industry average and their operating margin is higher. This is odd, but forms a great opportunity for investors. They pay out $0.66 annually, representing a yield of 1.05%. This is not a high yield, but any dividend is a great dividend if the company has solid growth like this one. 

 

The Foolish Bottom Line

Americans spend over $50 billion annually on their pets, and this number continues to grow. Forbes has said that 92% of people spent the same amount or more on their pets during the recent recession, which means that not only is the industry growing, but it is recession proof. PetSmart is the perfect way to play the growth in this industry, and it is for this reason that I am initiating an outperform call on CAPS. I believe this stock will test its 52 week high in the very near future and set new highs later this year. PetSmart is a stock I want to BUY.


JoeySolitro1 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and PetSmart. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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