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Is PetSmart Fully Valued?

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It's well-documented that Warren Buffett's ideal holding period is "forever." But as recent filings have shown, even the Oracle himself doesn't buy and hold blindly. He dumped names such as Nike (NYSE: NKE  ) Comcast (Nasdaq: CMCSA  ) in Q3. As I reflect on my own portfolio, it's time for me to consider whether my longest-tenured stock -- PetSmart (Nasdaq: PETM  ) -- has run its course.

On Wednesday, PetSmart reported earnings and guidance that met analyst estimates. This was a slowdown from the company's recent history of positive earnings surprises, which propelled its stock into a 38% climb year to date.

As every Fool knows, a nice run is no reason to sell a stock. But it certainly gets my attention, and makes me wonder whether the market's overvaluing those shares.

So what's it worth?
Using the midpoint of its expected full-year earnings for the current fiscal year, PetSmart's P/E ratio sits at 19. A quick look at its historical averages tells me that's right around the levels at which it's been valued in the past eight years, but a little richer than valuations for the last four.

Much like Mark McGwire, the stock market isn't here to talk about the past. Just ask Cisco (NYSE: CSCO  ) , which was hammered last week after issuing a dour forecast. While the numbers indicate that PetSmart is trading at its historical norms, you certainly should watch where the company is going.

Analysts have centered on earnings of $2.28 per share for next year, which would give a forward P/E of 16. This isn't all that different than historical norms, especially if you place added weight to recent years. This consensus estimate is within the 11% to 17% rate that management championed as the company's expected EPS growth rate.

Bottom line
It's been a great ride since I first bought the stock, but I think PetSmart is now fully valued. Unless you can see more growth in the bottom line than management does, or are forecasting expansion of multiples – an unlikely scenario for a maturing company – I just don't see outsized returns in the future. And while I don't feel that PetSmart is significantly overvalued, there may be better places to put my money. 

Nike and PetSmart are Motley Fool Stock Advisor recommendations. The Fool has written calls (Bull Call Spread) on Cisco Systems. 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.

Fool contributor Stephen J. Marini owns shares of PetSmart. He doesn't own any of the other companies mentioned. The Fool has a disclosure policy.

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