Pumpkin Patch a screaming buy

I'm going to do something I have never done before and recommend a stock to buy. I own shares in Pumpkin Patch Ltd [PPL.NZ] and the share price is at near the IPO price when it listed a few years back. It finished down 9c at NZ$1.83 today after reporting a near 23% fall in 2008 first half profit.

The fundamentals of the share price have changed, putting this company into the realms of an income stock whereas before Mr Market priced it as a growth stock-it had reached the dizzy heights of close to 5 bucks last year.

In my opinion though little fundamental has changed to the business itself during its market re-rating.

While profit was down 22.3% to just over $12 million, revenue was up soundly by 13.5% to $205 million, indicating that sales growth is on track and the appetite for the Pumpkin Patch brand is strong.

Clearly costs and a strong NZ dollar have bitten into profit.

As I have said before though, there is nothing the company can do about the exchange rate and many of the increased costs are those associated with growing a company in new markets. All relevant to the business and no surprise to retailers, people who own businesses and those in the market who don't focus on unnecessary hyperbole related to a short term view of the sharemarket.

I love the brand, the management and believe that their growing pains are just that.

Operations in the USA and UK are having a toughish time of things, but all retailers there are. They are still growing revenue, admittedly from a smallish base and once the one-off establishment costs are kicked touch, things should start to focus more tightly on the all important margins.

Managements forward outlook for the coming year is muted but a focus on increasing profitability at the large numbers of new stores they opened in 2007 is a good idea considering the short-term downturn in the retail sectors of their two biggest growing markets, the USA and UK.

I have no idea if $1.83 is the bottom share price wise, probably not, but it would surely find some resistance at the $1.25 IPO price, where brokers, who were extremely bullish on the company less than 4 years ago(and now seem they wouldn't touch it with 3 barge poles) might decide that is a good price to re purchase the stock they sold when the company hit a speed bump.

I recommend this stock as a very strong buy at these current prices if you have an investment horizon of 5 years or longer.

If it is less than that, forget it.


Disc I own PPL shares in the Share Investor Portfolio.


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c Share Investor 2008