PetSmart Will Need to Get Smart

Things heat up for PetSmart.

Jul 8, 2014 at 10:15AM

The second-quarter earnings season gets under way this afternoon, with Alcoa reporting results after the closing bell. In the meantime, U.S stocks are slightly lower Tuesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) down 0.6% and 0.7%, respectively, at 10:15 a.m. EDT. Nevertheless, the mood in equity markets is buoyant, as this statistic demonstrates, courtesy of Dealogic: Global equity issuance in the first half of the year reached $490.7 billion (with the U.S. contributing 29% of the total), up 21% from the same period last year. Even as more companies join the public markets, one company might be headed in the opposite direction: In a letter to the board of directors of PetSmart (NASDAQ:PETM) dated yesterday, one of the retailer's largest investors called for the company to consider selling itself to a private equity buyer.


Source: Wikimedia.

In making this request, Longview Asset Management, which owns 9% of the company, is joining activist hedge fund Jana Partners. Last Thursday, Jana disclosed that it had become PetSmart's largest shareholder, having built a 10% stake, and called for the pet supplies retailer to consider a sale or other alternatives to return significant capital to shareholders. PetSmart shares rose 12.5% on Thursday and a further 2.5% yesterday.

Jana Partners is a canny, value-driven activist. As its name implies, Longview is not a not fast-buck artist. As the money manager states on its website: "We invest as long-term business owners rather than short-term traders" (moreover, all Longview employees own the same equity portfolio as Longview clients). Longview has been a PetSmart investor since 2005.

In its letter, Longview argues that it advocates this tack because "our research suggests that Petsmart is likely to be valued much more highly by private market participants than by its current public market investors; the record of successful private equity acquisitions of pet companies, together with currently highly accommodative debt markets, supports a high valuation relative to the current stock price."

Jana and Longview may think that PetSmart could make an attractive merger partner for No. 2 pet supplies retailer Petco. Leonard Green and TPG took Petco private for the second time in 2006, paying 16.9 times forward earnings per share at a time when financing conditions were highly accommodative. Conditions are highly favorable today: PetSmart shares are valued at 14.6 times estimated EPS for the fiscal year ending Feb. 2, 2016.

It is easy (and even reasonable) to be skeptical of investors pushing for the sale of a company, but, in this case, Jana Partners' and Longview's interests are well aligned with those of individual shareholders. To prove that Longview is not simply interested in a quick profit, it has indicated a potential willingness to roll its existing stake into a privately held entity. Furthermore, combining with Petco would make a lot of sense -- scale matters in this business, particularly as competition with Internet retailers, including, intensifies. It PetSmart isn't sold, expect the company to raise its game -- and its cash return to shareholders.

Get your cash return with this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Alex Dumortier, CFA 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers