Those retail investors sniffing around stocks in the pet supply business are suddenly wishing they had already taken a bite. The No. 2 player in the market, Petco Animal Supplies ( PETC), announced Friday that it agreed to be acquired for about $29 a share by a private investment group. The deal offers shareholders a whopping 49% premium to Thursday's closing price of $19.45, and the shares closed up 44%. Shares of Petco's chief rival, PetSmart ( PETM), shot up almost 9% in the wake of the announcement as investors took a second look at this promising segment of the retail sector. Is it too late to get in on these puppies? "Even after today's increase, shares of PetSmart still look significantly undervalued," says Morningstar analyst John Owens. "We consider PetSmart to be the leader, by far, in this growing industry. It has big advantages over Petco, and the Petco transaction only signals that there is value in these companies that wasn't being recognized by the market." Now trading at about 15 times Wall Street's 2007 earnings estimates, PetSmart isn't sporting the kind of rich valuation that is commonly granted by investors to retail chains with its level of growth potential. With 850 stores in the U.S., compared with Petco's 775, PetSmart plans to open 90 stores this year. It plans to add 90 to 100 stores annually in the coming years, and it ultimately targets a domestic store count of roughly 1,400. Meanwhile, the company also has a high-margin services business growing at a consistent 20% clip that includes grooming, training and boarding for pets. This helps differentiate the stores from general merchandisers such as Wal-Mart ( WMT) and Target ( TGT) that dominate the $36 billion pet supplies business. It also sets it apart from Petco and mom-and-pop pet stores, which don't have the floor space or the capacity to offer such an array of options to customers.