Why PetSmart (PETM) Stock Is Jumping Today

NEW YORK (TheStreet) -- PetSmart (PETM) was gaining 12.7% to $67.37 Thursday after activist hedge fund Jana Partners disclosed a 9.9% stake in the retailer.

The hedge fund plans to talk to the company's board about a potential sale or other strategic options. Jana Partners' stake makes is the largest PetSmart shareholder.

More than 10.3 million shares of PetSmart were traded by 11 a.m. following the news, well above the average daily trading volume of about 2.3 million shares.

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

"We rate PETSMART INC (PETM) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, 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:

  • PETM's revenue growth has slightly outpaced the industry average of 1.5%. Since the same quarter one year prior, revenues slightly increased by 1.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • PETSMART INC has improved earnings per share by 6.1% 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 $4.03 versus $3.55 in the prior year. This year, the market expects an improvement in earnings ($4.34 versus $4.03).
  • 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, 0.48, is low and is below the industry average, implying that there has been successful management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.47 is very weak and demonstrates a lack of ability to pay short-term obligations.
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Specialty Retail industry. The net income increased by 1.3% when compared to the same quarter one year prior, going from $102.42 million to $103.77 million.
  • You can view the full analysis from the report here: PETM Ratings Report

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Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

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