Why PetSmart, Inc. Sank This Morning

Does this analyst make a good case? Or is it just more noise from Wall Street?

Jan 6, 2014 at 10:52AM

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of PetSmart, Inc. (NASDAQ:PETM) slipped 2% this morning after Deutsche Bank downgraded the pet products retailer from hold to sell.

So what: Along with the downgrade, analyst Mike Baker lowered his price target to $65 (from $73), representing nearly 10% worth of downside to Friday's close. While bargain hunters might be attracted to PetSmart's sluggish price action in recent months, Baker believes competitive headwinds and worrisome traffic trends will continue to weigh on returns.

Now what: Deutsche expects PetSmart's same-store sales to remain sluggish in 2014 and even sees traffic declining at some point during the year. "The biggest driver to slowing traffic trends is increased online competition, in our view," noted Mike Baker. "Although the online channel is only a low single digit percent of the pet business today and less than 1% of PETM's total sales, we believe it will continue to grow, further impacting PETM's in store traffic and comps."

When you couple those seemingly reasonable concerns with the stock's P/E of nearly 20, I'd agree that waiting for a wider margin of safety is prudent.

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Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends PetSmart. 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.

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