JP Morgan Remains Neutral On PetSmart Following In-Line Earnings

PetSmart

results In-Line with Guidance, but Short of Expectations. PETM reported EPS of $0.38 vs. $0.31 LY, in line with our and the consensus estimate. Comps of 5.6% drove the sales beat but earnings were plagued by 10 bps of SG&A deleverage and a $0.01 benefit from a lower than expected tax rate. Given expectations, we believe the results disappointed investors but the runway on accelerating traffic growth and gross margin expansion should keep the long crowd engaged. Fundamentals aside, J.P Morgan remains Neutral on the stock given generally positive investor sentiment and valuation. With the stock currently trading at ~16x its above- the-Street 2011 EPS forecast of $2.42, we see limited near term upside. While the counter argument continues to be that PETM is cheap on an EV/EBITDA basis, we think this P/E valuation simply caps out upside. JPM understands D&A will continue to fall and take the pressure off the P/E, but that is a multi-year phenomenon. J.P Morgan's Dec 11 price target of $40 is based on PETM trading at 16-17x our 2011 EPS forecast of $2.42 and a ~7x EV/EBITDA. J.P Morgan remains Neutral and has a $40 PT on PETM PETM closed Wednesday at $38.28