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Will This Downgrade Hurt PetSmart (PETM) Stock Today?

NEW YORK (TheStreet) -- PetSmart Inc. (PETM) was downgraded to "underperform" from "neutral" at Bank of America (BAC) Merrill Lynch.

The firm downgraded the company's rating due to the increase in competition the pet care retailer is facing.

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TheStreet Ratings team rates PETSMART INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate PETSMART INC (PETM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its notable return on equity, good cash flow from operations, growth in earnings per share and increase in stock price during the past year. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Specialty Retail industry and the overall market, PETSMART INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has slightly increased to $273.91 million or 2.81% when compared to the same quarter last year. In addition, PETSMART INC has also modestly surpassed the industry average cash flow growth rate of -6.80%.
  • PETSMART INC's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, PETSMART INC increased its bottom line by earning $4.03 versus $3.55 in the prior year. This year, the market expects an improvement in earnings ($4.47 versus $4.03).
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 6.3%. Since the same quarter one year prior, revenues slightly dropped by 4.0%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • In its most recent trading session, PETM has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • You can view the full analysis from the report here: PETM Ratings Report

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