It was just last week that PetSmart Inc. (NASDAQ: PETM) was hit by a research report from Nomura. In fact, when we highlighted the implication of the call PetSmart shares were down by 8.6% at $63.95 due to pressure from Amazon.com Inc. (NASDAQ: AMZN) and other issues about the company’s business peaking. After closing the week out at $63.98, PetSmart shares have a new ally as Bank of America/Merrill Lynch raised its outlook on the company.
Nomura’s downgrade was to Reduce from what Wall St. already considers to be a cautious Neutral rating. Nomura even slashed the pet-supply retail giant’s price target per share to $55 from $72. Here is what stands out in today’s call from BofA/Merrill Lynch: the firm raised its rating to its prized US 1 List. For those of you who follow lists from brokerage firms, this is the equivalent of the Conviction Buy List or the Must-Own Lists you see elsewhere.
BofA basically steps all over Nomura’s thesis that we summarized just last week. The report says:
We are adding PetSmart, our retail top pick for 2013, to the US 1 list, given PetSmart’s favorable product cycle and our belief that the Street continues to under-appreciate the company’s earnings power (more than half of the Street still rates it a Neutral). Coupled with a growing buyback program and rising dividend, we think the stock will continue to warrant a premium and that further upward earnings revisions are likely. In our opinion, PetSmart’s consistent improvement of its operating model through company-specific initiatives provides insulation against both retail and online competitors.
In short, Joe and Jane Doe are not going to let Fido and Fifi suffer. BofA rates the price target at $85, well above the $55 target from Nomura. Note that these two research calls are about as opposite as they can get. Thomson Reuters has the street-high price target at $85 and the street-low at $55 for PetSmart.
The call this morning is working. PetSmart shares are up 1% at $64.62, with a market cap of $6.94 billion. The 52-week trading range is $52.83 to $72.75.