A Financial Analysis of Pantry Incorporated |
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By: Dennis Biray Posted: 2007-01-31 22:42:44 |
| I truly believe that there are gems found in every sector and industry, regardless of the economic situation. Relative to the grocery store industry, while giants such as Safeway and Kroger hold a large market share in terms of capitalization over the industry, I have found a smaller, middle capitalization stock which has support to be understood as undervalued. This company, Pantry Incorporated (PTRY), after examining its fundamentals and technical features, regardless of recent news, has the capacity, as it has illustrated over the past few years, to continue its momentum and allow investors to claim strong capital gains.I mentioned that Pantry is still a strong buy regardless of its recent news. Unfortunately, during this previous week, Pantry reported its quarterly earnings. Falling significantly short on its quarterly EPS estimates, Pantry increased cautionary emotions among investors when it claimed that its guidance for 2007 will be slightly lower than first understood. While some investors may claim this piece of news is very pessimistic, regarding the share price Pantry currently trades at, there should not be too much commotion activated among investors. Stating that the tail end of the year’s EPS should sit around 2.75, at Pantry’s current price, the company would maintain a forward looking P/E ratio of about 17 which is significantly below the multiple of both the industry of 22 and near the multiples of large cap rivals of Kroger at 16 and Safeway at 18. While of course investors and shareholders are always looking for growth in a company and having an EPS estimate which is 25% lower than the current reading is not favorable, as an investor, it is important to understand that the economy is slowing declining in terms of growth and most all companies will begin to feel the impact on their respective earnings.During such times, it is vital for investors to look for value stocks, rather than growth, in defensive areas to maintain a strong and positive portfolio. In addition, because Pantry takes control over numerous convenience stores which supply inelastic goods such as tobacco, alcohol, and grocery items, investing in Pantry may be a wise decision for the next few months when uncertainty is placed on the final outcome of the US economy.While I mentioned that Pantry is undervalued relative to the industry, it is also important to note that this company has only recently begun trading publicly and has strong growth potential relative to its share price. Examining more closely on the basis of figures, Capital IQ has suggested over the next five years at predetermined growth rate that Pantry, at its current share price, has a PEG ratio of 0.96. Comparing this number to the 1.82 PEG ratio found at both Safeway and Kroger adds extra emphasis that this company is still growing and has the potential, at its current price, to become even more undervalued. Taking a closer look at more unconventional multiple valuations, Pantry has done extraordinary well in reference to sales and revenue as illustrated with its astonishing 0.21 P/S ratio and 0.35 EV/R ratio over the past twelve months. Comparing these numbers to Kroger’s 0.27 and 0.35 respective numbers or even Safeway’s 0.39 and 0.53 respective numbers, Pantry, even as a middle capitalization stock seems to be performing quite well relative to the industry giants. In addition, Pantry also has been producing cash at excellent rates with an EBITDA, a proxy of cash flow, of near 280 million over the past twelve months and a solid profit margin of near 2%. Furthermore, Pantry’s ROE of about 30% is substantially higher than Kroger’s 23% and Safeway’s 14% which again signals that Pantry is taking appropriate measures with the funds it is receiving. Such analysis also acquiesces with the strong current ratio of 1.4 which Pantry holds, which is the only company out of Kroger and Safeway to post more current assets than current liabilities. Overall, when compared to the rest of the industry and the selected leaders, Pantry has lots of potential to improve relative to share price and possibly can continue its strong rally held from the previous six years.In addition to the numbers, as stated prior, Pantry has grown relative to share price in dramatic fashion since its IPO debut in 1999 and has the strong technical support to advise further growth. Growing over 66% over the past two years and more than 150% over the past three years, Pantry, currently trading near 50 is below the simple moving average for the past 50 days, signaling strong growth potential. In addition, during the most recent quarterly report when the lackluster earnings picture worried some buyers, on high volume, the share price only fell marginally which signals some fairly bullish sentiment from shareholders. Thus, after examining the US economy, the fundamentals, and the technical outlook for Pantry, there is strong evidence to support that this company has all the right pieces to provide shareholders with the opportunity to take in a nice wealth of capital gains. |
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