idea #16 the Pantry (PTRY)

I was attracted to this idea because it came up on some screens:
John Neff and Earnings upgrade -AAII screen
CHEAP multiples
earning's surprise in most recent quarter
Investor exhaustion - 3 years of disappointing returns for equity holders.

The Pantry is a chain of c-stores in S.E. US.  They acquired many properties during peak real estate bubble years.  Acquisitions were expensive.  They didn't issue many shares to pay for the acquisitions, instead they did issue bonds and convertible debt.   According to my analysis, they'll need $122 million a year for 2010 and 2011 to meet their debt obligations.  They'll need $247 in 2012 (or likely just $122 million and they issue a lot of shares for the convertibles).  They'll need $122 million in 2013 and $272 in 2014.   It's an aggressive payback schedule giving this idea significant downside.  Operating cashflows have averaged $160 million per year for the last 7 years.  Their most recent quarter's cash flow from operations won't be good enough to make their debt repayment schedule work, as it was only $21 million. 

Analysts don't seem to talk about a default as even a possibility. I guess because they are sitting on $179 million in cash as a buffer (no near term liquidity issues) for bad quarters, and the debt is secured by hard assets, they'll likely be able to refinance if they need to.  I think their debt is manageable but it is close to being too much. 

Assets that they acquired might be at the end of their life.  They recently shut down gas stations that needed their tanks replaced because it was not economical.

This is the opposite of what I want to see. I want a company that acquired cheap assets with expensive shares, now holding expensive assets with cheap shares. These guys acquired expensive assets with debt and now have cheap shares... because of the debt overhang.