Wedbush Reiterates Neutral Rating On PetSmart As Competition Increases And Consumer Behavior Changes
In a research note released Monday, Wedbush analyst Seth Basham maintained a Neutral rating on PetSmart (PETM) and raised his price target to $64 (from $60) following last Thursday’s news that Jana Partners made an investment in PETM , which gave Jana a 9.9% stake in the company and sent share prices up by 12.5% on that day.
Basham wrote, “With 17% of PETM shares sold short, sentiment appears negative on the shares. We believe investors view threats from increased competition and brand migration to mass and grocery as weighing heavily on this retailer who is operating at peak sales productivity and margins. Yes, these threats have been present for the last 15 years and PETM has been able to differentiate itself and deliver solid EPS growth and returns in a retail segment with attractive secular growth. However, consumer shopping behavior is changing rapidly and PETM likely needs to rebase earnings and ramp capex investments to better compete in the long run, relearning the trick that started to propel its stock outperformance in 2009. That prospect leaves us neutral on shares, despite what we view as a relatively attractive valuation and the potential for an acquisition of Petco in 2015 or beyond.”
With regards to the potential acquisition deal with Petco, Basham noted, “We still believe an acquisition of Petco is the most likely (and most value creating, with ~30% EPS accretion) strategic action. We noted the potential for private equity to acquire PETM given the relatively steady cash flow business and the flexibility afforded for investing in omnichannel without public market scrutiny and further note that private equity does have an interest in this space as evidenced by TPG’s/Leonard Green’s LBO of Petco in 2006 and Irving Place’s acquisition of Pet Supplies Plus in 2010. However, we continue to view a sale to PE as a low probability given no potential synergies, already tight capital and cost controls and high required profitability projections, leverage levels and exit multiple necessary for a deal to be attractive. On our baseline assumptions, the 5-year IRR on a transaction is only 11% (see model inside)”.
According to TipRanks.com, analyst Seth Basham currently has an average return of 11.9% and a 90% success rate. Basham is ranked #1099 out of 3162 analysts.