Why PetSmart (PETM) Tumbled Pre-Market Wednesday

NEW YORK (TheStreet) -- Shares of PetSmart (PETM) are tumbling in pre-market trading on Wednesday, falling 3.1% to $65.

Earlier, the specialty retailer received a downgrade from UBS to "neutral" from "buy" with a price target of $72. The investment bank said the rating change was driven by the departure of chief operating officer Joseph O'Leary and difficulty in gaining market share with an already sizable position. 

Last week, Deutsche Bank downgraded the stock to "sell" from "hold" with a price target of $65, pointing to slower traffic trends and increased competition. 

TheStreet Ratings team, however, reiterates PETSMART INC as a Buy with a ratings score of A. The 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 impressive record of earnings per share growth, revenue growth, notable return on equity, largely solid financial position with reasonable debt levels by most measures and increase in net income. 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:

  • PETSMART INC has improved earnings per share by 17.3% in the most recent quarter compared to the same quarter a year ago. 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 $3.55 versus $2.56 in the prior year. This year, the market expects an improvement in earnings ($3.97 versus $3.55).
  • Despite its growing revenue, the company underperformed as compared with the industry average of 7.6%. Since the same quarter one year prior, revenues slightly increased by 4.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • 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.
  • The current debt-to-equity ratio, 0.43, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that PETM's debt-to-equity ratio is low, the quick ratio, which is currently 0.57, displays a potential problem in covering short-term cash needs.
  • The company, on the basis of net income growth from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Specialty Retail industry average. The net income increased by 12.0% when compared to the same quarter one year prior, going from $82.32 million to $92.22 million.

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