Friday, January 3, 2014

PetSmart Performing to Expectations

I have owned PetSmart for six years and it has tripled in that time. My earlier writeup was a year ago, so I think an update is in order.

PetSmart is the the largest pet retail chain and it owns 40% of the US market. The pet industry is a $53 B industry. About 62% of household have pets and I estimate that Americans spend about $250 on each cat and dog annually. I think our pet owners can and should do better than that!  The pet industry has been growing at about twice the rate of GDP, and trend should continue. Although I don't believe we will have much more pets in homes, I do feel that as a wealthy society, we will gradually spend more than $250 on each pet annually. So even if PetSmart does not grow market share, which it has done successfully in the past, earnings should still outgrow the GDP. The following supports this point.

Revenue and Earnings (mil)

Div yield1.2%
P/E18x .
Note that the chart shows the total earnings growth. Per share earnings growth is even greater due to regular share buybacks.

The downside to this stock is the relatively high earnings multiple. I generally stay away from anything with a multiple above 20. And PetSmart is close. But I am keeping it for two reasons. One is that I hope PetSmart will do what Coke did for Warren Buffett. Buffer bought Coke in the 80's and it has returned about 12% annually for 30yrs. He also bought Coke at a high multiple, but the company's moat was worth it. PetSmart doesn't have quite a moat, but it is the leader in a superb industry. The second reason I am keeping the stock is I want to avoid capital gains tax.

In other news, we have just ended a memorable year with the US markets up 30%. Who would have predicted that twelve months ago! But 2014 is another year and another chance for the pundits to redeem themselves. The following by Tren Griffin is the funniest though.

CNBC will continue to lose viewers by trying to make its programming similar to ESPN’s Sports Center, even though that approach is *exactly* what sends ordinary investors to their financial doom and *ensures* that ordinary investors will stop watching CNBC (i.e., the CNBC ratings death spiral will continue).

That does make me a bit sad. Now that is one less media outlet to goad suckers to take the other side of my trades *sigh*. Well, I hope Jim Cramer will find another network to hire him on after CNBC dies!

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