Streetwise

Lauren Rudd

Sunday, June 24, 2012

What to Do With An Unnoticed Company

Wall Street can be a frustrating place, especially when the intrinsic value of a company’s shares goes unnoticed. Unfortunately there will be times, actually many times, when regardless of how well a company has performed in the past and how upbeat its future looks going forward, it is ignored.

So what do you do in such an instance? Relax, because the only cure is time. If a company is a true performer, and if the earnings are there quarter after quarter and year after year, then it is only a matter of time until the shares come into their own.

An excellent example of an often ignored stock, and one you might want to investigate, is PetSmart (PETM). This company is a particular favorite of mine for reasons other than investment returns given my indubitable collection of pets.

A year ago my earnings estimate for fiscal 2012 was $2.42 with a 12-month target price on the shares of $49, thereby returning a capital gain of 13 percent. The shares had closed back then at $43.27, while the company earned $2.01 per share for FY 2011.

So how did the company do? This is one selection that I have to give myself a bit of pat on the back as the shares recently closed at $69.36 for a capital gain of 60 percent. Earnings came in at $2.55, or 5.40 percent ahead of my $2.42 estimate.

Then last month PetSmart reported first quarter earnings of $0.85 per share, up 39 percent when compared to the $0.61 per share during the same period a year ago. Net income was $95 million for the first quarter of this year as compared to $71 million a year ago.

Total sales for the first quarter of 2012 increased 9.4 percent to $1.6 billion. The increase was partially impacted by $2 million in unfavorable foreign currency fluctuations. Comparable store sales, or sales in stores open at least a year, grew by 7.4 percent, benefiting from comparable transactions growth of 3.3 percent. Services sales, which are included in total sales, grew 8.3 percent to $181 million.

During the first quarter, the company generated $150 million in operating cash flow, spent $36 million in capital expenditures, distributed $15 million in dividends, and repurchased $175 million of its own shares. The company ended the quarter with $341 million in cash, cash equivalents and restricted cash and zero borrowings on its credit facility.

While 2012 contains a 53rd week, for all of 2012, PetSmart is projecting comparable store sales growth in the mid-single digit range, and total sales growth in the 9 to 10 percent range. The company is also raising its earnings per share guidance from a previous range of $3.02 to $3.16, to the current guidance of $3.19 to $3.31.

The impact of the extra week is estimated to be $120 million in sales and $0.16 in EPS. For the second quarter of 2012, the Company indicated that it expects comparable store sales growth in the mid-single digit range, and earnings of between $0.61 and $0.65 per share.

You might also be interested in knowing that since 1994, PetSmart Charities, an independent 501(c)(3) non-profit animal welfare organization and the largest funder of animal welfare efforts in North America, has provided more than $165 million in grants and programs benefiting animal welfare organizations. Through its in-store pet adoption partnership with PetSmart Charities, PetSmart has helped save the lives of nearly 5 million pets.

PetSmart recently announced an increase its quarterly dividend by 18 percent from $0.14 to $0.165 per share beginning in the second quarter of fiscal 2012. Meanwhile, the intrinsic value of the shares using a discounted earnings approach is $77. A more conservative discounted free cash flow to the firm model generates an intrinsic value of $104. The shares recently closed at 69.36.

My earnings estimate for 2012 is $3.28 per share for a forward P/E of 21 based on the current share price, and a projected 12-month share price of $77 for a capital gain of 12 percent and a P/E of 23, as compared to today’s P/E of 25. In addition, there is an indicated dividend yield of 0.8 percent.