I grew up in a dog family.
By which I don't (necessarily) mean to say that I was raised by wolves; just that in my family the humans were generally outnumbered by the other mammals -- felines, equines, various avians, and, most of all, canines. With all these animals, you might think that we were either very rich (to be able to afford dozens of veterinarian visits every year) or very poor (after paying for said visits). The truth is actually neither one -- we hardly ever saw more than one or two vet bills a year, incurred on behalf of various furry or feathered patients. But it just never crossed our minds to take an animal to the vet unless it was sick.
Ah, simpler days. America has changed a lot since then. The choices of premium-priced dog chow are beginning to outnumber the varieties of more basic fare in our local supermarket aisles. These days, our one (yes, just one) dog visits the vet every year for a series of booster shots. The majority of dog owners I know actually pay good money to take their dogs to the dentist once a year (or more). Clearly, there's a lot of money to be made in pet-pampering.
In an attempt to capitalize on this relatively recent development, Fool co-founder and all-around forward-thinker David Gardner chose PetSmart (NASDAQ:PETM) as his February 2005 pick for Motley Fool Stock Advisor. So far, the pick hasn't exactly worked out well for us, with PetSmart down roughly 18% since its selection -- albeit that's better than rival Petco (NASDAQ:PETC), which is down 40% over the same period. But then again, when you think about it, the fact that the stock has fallen just might mean that PetSmart's become a better deal than ever -- as long as you buy the investment thesis that David laid out back in February. (And if you haven't read it yet, you should. And you can. See below for details.)
True, analysts expect the company to underwhelm the market when it reports earnings Wednesday afternoon. They're looking for PetSmart to report a 21% year-over-year decline in profits to $0.19, parroting the company's own earnings warning of one month ago, in which it promised profits of $0.18 to $0.19. For the year, expectations are for PetSmart's earnings to flatline against last year's numbers.
But this dog just might hunt yet. Next year, the same analysts who are treating PetSmart like it's got fleas today expect the company to post 20% profits growth. The company has a market cap of $3.6 billion and $171 million in trailing free cash flow, and, thus, trades at 21 times free cash flow. That means PetSmart looks pretty fairly priced right now. Any outperformance tomorrow -- and remember, the company has outperformed the "experts'" predictions three times in the last four quarters -- could give this stock some room to run.
Why does David Gardner think PetSmart isn't the, er, dog that analysts take it for? Read all about it in your free trial subscription to Motley Fool Stock Advisor . You'll have 30 days to review David's recommendations -- PetSmart and dozens of past picks -- free. After that, you decide whether to subscribe or not, with absolutely no strings attached.
Fool contributor Rich Smith does not own shares of either company named above.
