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Shares of PetSmart (Nasdaq: PETM ) hit their highest point ever today. Let's look at what's driving these gains to understand what lies over the horizon. Are there clear skies ahead? We'll have a better forecast once we examine the details.
How it got here
PetSmart's been moving in one direction all year, and it's the one shareholders always want to see. The stock hasn't again enjoyed the same one-day lift its first quarter offered shareholders, but that hasn't stopped its momentum:
PetSmart has offered the right combination of product depth and breadth for pet owners for it to thrive in an uncertain retail climate, beating out the respectable performances of veterinary supplier VCA Antech (Nasdaq: WOOF ) and pet pharmacy PetMed Express (Nasdaq: PETS ) , as well as a strong year from VCA competitor MWI Veterinary Supply (Nasdaq: MWIV ) .
As Fool contributor Sean Williams points out, PetSmart is a good corporate citizen for the nation's pet owners, helping with the adoption of over 5 million pets and donating millions annually to facilitate pet adoptions. Its second-quarter results put numbers to that loyalty, with EPS up 31%, same-store sales up 7%, and service sales up 7%.
PetSmart's got the momentum. Does it have the value to make this growth sustainable? Let's find out.
What you need to know
PetSmart isn't particularly out of line with its pet-supply peers:
Price to Levered Free Cash Flow
Net Margin (TTM)
Projected Growth Rate (2013)
|MWI Veterinary Supply||26.5||NM||2.6%||11.9%|
Source: Yahoo! Finance. TTM = trailing 12 months. NM = not material due to negative results.
Higher growth rates often match up to higher valuations, and PetSmart isn't even as highly valued as MWI, which has a slimmer net margin and negative free cash flow. But it's important to consider whether or not PetSmart's more highly valued than it has been in the past, and that turns out to be the case when you examine its historical P/E trend:
Few companies outside of Amazon.com (Nasdaq: AMZN ) can sustain that kind of long-term P/E appreciation for years at a time. That might imply trouble ahead for PetSmart, should it ever have a substandard quarter. Should that happen, Amazon could be a big reason for it -- its Wag.com pet-supply supersite already offers a wider selection of products than PetSmart's own online offerings. Online pet supply sales are a small sliver of the total revenue pie in this sector. That gives Amazon more upside than PetSmart when online sales ramp up, provided it can leverage a superior warehouse-and-delivery infrastructure.
Where does PetSmart go from here? It's ridden the popularity of pet ownership to impressive growth, and that's one trend that seems to have legs (and claws, and beaks, and tails). However, the company isn't immune to competition, either from online challengers or retail superstores. Its stock price needs consistently strong earnings to keep growing, but that's a reasonable expectation as long as Americans can afford to pamper their pets.
The Motley Fool's CAPS community has given PetSmart a four-star rating, with only 11 of 276 CAPS All-Stars expecting the stock's growth to underperform in the future.
Interested in tracking this stock as it continues on its path? Add PetSmart to your Watchlist now, for all the news we Fools can find, delivered to your inbox as it happens. If you think Amazon might have better long-term success in pet supplies -- or if you want to keep track of a major challenge to PetSmart -- you need the Fool's new premium research service. Your subscription grants access to a year's worth of detailed Amazon analysis, including any new retailing plays by the dot-com giant. Subscribe today and get your Amazon education started.