Streetwise: Wall Street misses the value of pets

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Although June is known for many wonderful things, historical kindness to the financial markets is not one of them. While June might play host to weddings, Father's Day, Flag Day, D-Day, the start of summer and the end of school, the Stock Trader's Almanac lists June's post-World War II average return at negative 0.3 percent.

And if June did not have enough bad karma, a media-hyped Hindenburg Omen has the lemmings gathering at the edge of the proverbial cliff. The Hindenburg Omen is a technical pattern of stock prices that is said to foreshadow a market crash within the 40 days after two out of four specific technical events happen in a 36-day period. All four occurred back in April and again in May.

The four events are: The number of new 52-week highs and new 52-week lows are greater than 2.8 percent of advances and declines of shares traded on the New York Stock Exchange. New 52-week highs are less than twice new 52-week lows. The 10-week moving average of the NYSE is higher than it was 50 trading days ago. The McClellan Oscillator (an overbought or oversold indicator) is down the same day.

Name connotation notwithstanding, the idea that anyone would subscribe to the idea that four technical indicators portend a market crash in 40 days is mind boggling.

I would agree that Wall Street can be a frustrating place even without the voodoo. This is especially true when a company's share price repeatedly fails to reflect its intrinsic value. An excellent example, and one indicative of its industry, is PetSmart (PETM).

The pet industry receives little attention and yet 62 percent of all households own a pet; spending $53.33 billion in 2012. The industry is relatively bullet-proof. During the economic collapse of 2008-09, pet products sales were $45.5 billion, up from $43.2 billion.

A year ago, my 2012 earnings estimate for PetSmart was $3.28 per share with a 12-month target price on the shares of $77. The shares recently closed at $66.85, while earnings came in at $3.55, or 8.2 percent ahead of my $3.28 estimate. Although the shares did hit a price of $70.51 as recently as May 10, Wall Street is not giving PetSmart its full due.

For its first quarter ended May 5, PetSmart reported per share earnings of 98 cents, up 15 percent from a year ago. Net income for the quarter totaled $102 million, as compared to $95 million in the first quarter of 2012.

Sales for the first quarter of 2013 increased 5 percent to $1.7 billion. The increase was partially impacted by $2 million in unfavorable foreign currency fluctuations. Comparable store sales, or sales in stores open at least a year, grew 3.5 percent. Sales of services, which are included in total sales, grew 5.8 percent to $192 million.

During the first quarter, the company generated $147 million in cash flows from operating activities, spent $35 million on capital expenditures and repurchased $180 million of its own shares. The company ended the quarter with $324 million in cash and cash equivalents and zero borrowings on its credit facility.

For fiscal year 2013, the company's guidance is for store sales to grow 3 to 4 percent, with total sales up 3 to 4 percent. The latest guidance calls for earnings of between $3.82 and $3.94 per share.

The intrinsic value of the shares using a discounted earnings approach is $108. A more conservative discounted free cash flow to the firm model generates an intrinsic value of $134. My earnings estimate for 2013 is $3.95 per share with a projected 12-month share price of $75 for a capital gain of 11 percent. There is also an indicated dividend yield of 1 percent.

bizopinion

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com.


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