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Stock To Watch: Petsmart (PETM) Shares May See Corrections Before Any Upside Despite Positive Outlook

 March 01, 2012 01:55 AM

Shares of Pet store chain operator PetSmart (Nasdaq: PETM) are likely to see corrections before any upside can be seen. This is primarily due to two reasons, one is the stock has witnessed 16.95 percent upside after the third quarter results announcement but before the fourth quarter earnings release. In comparison, S&P 500 advanced 10.4 percent.

The stock has surged 37.6 percent since October 3. During the same period, S&P 500 gained 24.24 percent. This has promoted few analysts to suggest that the stock has become overvalued as the stock closed Wednesday's regular trading at $55.74, which is just 1.15 percent below the 52-week high of $56.30. Still, Nomura reiterated its Buy rating with a price target of $62 on February 7, suggesting there is still opportunity for upside.

[Related -Petmed Express Inc (PETS): A Stock With 43% Upsid - Driven By An Extremely Loyal Market]

Second is the concern on gross margin, which seemed to have come slightly below analysts' expectations. The company's gross margin for the fourth quarter slipped to 30.4 percent from 30.6 percent in the year-ago quarter, but it has improved sequentially from 28.14 percent in the third quarter, 28.94 percent in the second quarter and 29.02 percent in the first quarter. But the volatility may remain a concern.

The operating margin for the fourth quarter improved sequentially as well as year-on-year. PetSmart's operating margin increased to 10.38 percent from 9.86 percent in the year earlier quarter, 6.8 percent in the third quarter, 7.46 percent in the second quarter and 8.16 percent in the first quarter indicating volatility.

[Related -PetSmart, Inc. (PETM): Pullback Is A Buying Opportunity]

The two factors seemed to have caught the investors in dragging down the stock by more than two percent in the extended hours trading on February 29, leaving the positive outlook for the first quarter and 2012 to back burner. Of course, the general sentiments were somewhat subdued after Fed chairman's comments on growth.

PetSmart sees earnings of 70 – 74 cents a share for the first quarter on comparable store sales upside between low and mid-single digit range. Similarly, for the year 2012, the company projects earnings of $3.02 - $3.16 a share on revenue growth of 7.5 – 8.5 percent growth and comps increase of 3-4 percent.

Street analysts predict the company to earn 70 cents a share on revenues of $1.58 billion for the first quarter and $3.01 a share on revenue growth of 7.3 percent for the full year. The company's guidance is way ahead of street analysts' estimation.

For the fourth quarter, PetSmart reported net income of $102.0 million, up 13 percent from $90.3 million and earnings increased 18.2 percent to 91 cents a share from 77 cents a share in the year-ago quarter. Total sales rose 8 percent to $1.64 billion from $1.52 billion in the prior year quarter. Analysts' were estimating the company to deliver earnings of 90 cents a share on revenues of $1.62 billion.While the fourth quarter results and guidance look perfect bet for an uptrend, the advanced run in the stock price might force investors to resort to corrections taking advantage of higher levels that currently exists. However, if the general sentiment remains positive, then postponing corrections cannot be ruled out that would result in the stock seeing upside on Thursday.



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