expensive products such as "all-natural" and "weight-management" feeds -- for themselves and their animals. It's difficult to find fault with PetSmart as an investment, although it carries a relatively high 21.2 price-to-earnings ratio. The company, with a market value of $3.5 billion, is increasing market share in a steadily growing industry, even as it competes with big-box retailers, such as Wal-Mart ( WMT - Get Report) and Target ( TGT - Get Report). And it has a long record of revenue and earnings growth, and makes efforts to reward shareholders. In its most recent quarter, PetSmart reported revenue of $1.4 billion, a 6.2% increase, and earnings of $48.8 million, a 24% jump. That led the company to raise its 2010 profit guidance for the second time this year, to $1.91 to $1.99 per share, up from an estimate of $1.82 to $1.92, in May. PetSmart has returned excess cash to shareholders, including a 25% increase in its quarterly dividend, and the recent launch of a $400 million share-repurchase plan. Much smaller PetMeds, with a market capitalization of $390 million, suffers by comparison, albeit unfairly. Its once-booming pattern of sales and earnings growth has slowed this year, giving analysts grounds to downgrade its stock. It price-to-earnings ratio is 13.4. PetMeds' share price began to slide after the company reported a disappointing second quarter in June. Sales fell 3.6% to $74.4 million, the result of a pullback in buying by cost-conscious consumers. As a result, earnings tumbled 11% to $7.2 million.
Nevertheless, PetMeds' long-term investment appeal should remain intact, based on its low-cost business model, which has produced steady and strong free cash flow and a five-year annual record of 17% revenue growth, 27% earnings per share growth and a more than 30% return on equity. PetMeds, doing business as 1-800-PetMeds, also boasts a 6% market share of the pet-medications market, which makes up about 8% of total pet-industry sales. That market share isn't likely to shrink given the company's unique competitive advantage: it's licensed to fill prescriptions in all 50 U.S. states, something its competitors can't match. And that puts it in a position to renew its pattern of double-digit growth when pet owners start filling their wailing pets' prescriptions on time, once again.
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