The Pantry, Inc. (PTRY)

P/S less than three- EV/EBITDA less than five- lots of cash flow- depressed price- Long term outperform

This convenience store operator was left behind during the recent rally. I suspect that this stock will become "fashionable" again in the near future.

BBE 6 6 -99

Mmm...convenience stores...

Zacks Research picks May and June

earnings projections are on the way back up, and this stock is far below the P/E of its industry peers. On the next one or two earnings cycles, I think it will bounce quite significantly. I note it's been ahead of earnings projections (way ahead!) for the last two quarters.

Recent Price and earnings momentum.

reloading at lower price

hit a bottom

Bought Puts.

Numbers are good, Management seems solid. Can't do much about oil and gas prices, but you can make good money from buying oversold stocks. Chalk another one up to panic and mayhem. Personally, when I saw this stock go below $12, even I was panicked... Panicked my buy order for 2000 shares wouldn't go through before the stock price returned to $14 - $15.

Stock collapsed on a bad fuel hedge and slightly lower sales. It should recover nicely as margins improve in the coming quarters. The sell off is overdone, and even looks like it could be a classic no uptick bear raid.

I see a company which has made some aquisitions and is not paying off the debt from these to retool the stores under one brand name. Big future profits is what I belive the result will be.

Great growth and earnings.

Near it's 52 week low. Low P/E with good earnings ahead.

Fuel prices are down, which reduces store overhead. Fuel is basically a break-even item for most convenience stores intended to get customers in the store to buy other items. The small amount of markup they have on fuel (if they have a markup at all) doesn't increase even when fuel prices rise.

But convenience stores have a higher markup on their non-fuel products than most grocery or retail stores have - they get that kind of pricing power in exchange for the location-based convenience of their stores. And The Pantry is growing through acquisitions - they seem to have bought half the convenience stores in Georgia and Tennessee in the last five years. (Everything now is Kangaroo, which is The Pantry's primary brand.) That increasing scale will give them more pricing power.

1500+ stores across 11 states and growing. One of the hungriest fish in a fragmented (but quickly consolidating) market. Low P/E. Stock near 52-week low. They're repurchasing shares. Quickly becoming the 24-hour Wal-Mart of convenience stores. If they paid a dividend it would arguably be one of the best stocks out there right now.

Well off its 52 week high, making it a current buy. Under the radar, but a good company.

PTRY EPS suffered this year due to integration costs and a uncharacteristically weak Q1'07. When Q1'07's EPS of $0.01 rolls off and is replaced by a more normal $0.60, the company should be well on its way to achieving its projected $2.80 to $3.10 EPS for fiscal '08. This is not a heroic leap. If margins simply remain at their Q2 levels and gas gallons are flat, this EPS is not going to be a challenge. I believe analysts ($2.83 EPS est.)are overly discounting management's forecast because management was forced to lower it's estimates for F'07 due to the unusually high prices of gas. But as gas prices stabilize (or, better yet, decline some), PTRY will be able to make normal margins (as it did in Q2'07 and Q3'07).

If you believe in the '08 EPS as I do, then the stock appreciation arguement is an easy one. 18x $2.80 is a $50.40 stock price and a 48% increase--much higher than I expect for the S&P. Even at 16x its a $44.80 price and a 31% increase. And if gas prices decline, and/or the Petro acquisition's merchandise margins can be increased to match the rest of PTRY's, there is great upside!

I also believe the leverage ratio of the company is overstated. No doubt, they carry a significant amount of debt, but it is important to include a full year of Petro Express' earnings, which the historical numbers do not. This can be seen in a projection of PTRY's Net Debt/EBITDA levels which fall from about 4.75x as of Q3'07 to about 3.75x as of Q4'08. EBIT/interest is over 2x the whole time. To me, their leverage appears very managable. This is supported by their built-in bank loan increase feature, allowing them to increase their bank facility by $100 million in the next year.

If I had a criticism, it would only be that I'd like to see management more aggressively buying their stock, especially at the current price. However, the recent buyback certainly indicates that the board believes in the attractiveness of the stock price and the future cash flows of the company.

Excellent management and a track record of performance