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

Broker downgrades of Pumpkin Patch lack long term vision

Pumpkin Patch, a children's wear
company with more than 200 stores
in four countries, will open a
6,095-square- foot store at Columbia Mall,
in Baltimore, in the mall's lower level,
near Lord & Taylor, on March 25.
New collections, designed by an in-house
team, are introduced throughout the season.



Broker downgrades on Pumpkin Patch Ltd [PPL.NZX] sent the share price down 9% today, NZ.19c down to a multi year low of $1.97.

Broker ABN Amro has this to say:


... its forecasts for the company's first-half earnings, due out next week, this time by a whopping 19 per cent and down to $NZ12.6 million ($11 million).

Pumpkin Patch's problems centre on the poor prospects for its stores in Britain and the US - the latter no real surprise given the growing likelihood of a recession there. Its many Australian outlets are, by contrast, doing well, thanks to the hot economy, with earnings growth hitting 23 per cent.

However, says the ABN analyst Carolyn Holmes, that won't be enough to offset the declines abroad, which is why she has cut her target price for the NZ-listed shares from $NZ3.13 to $NZ2.53.

It is not clear from analyst Carolyn Holmes how she arrived at her downgrade or the reasons for them but I am going to take an educated stab at it.

Clearly the weak US dollar and stronger Kiwi is affecting repatriated profit back to New Zealand.

Nothing Pumpkin Patch management can do about that and not overly material to the day to day short/medium term running of the company. It is something that could get worse before it gets better.

"...poor prospects for its stores in Britain and the US...", well, I wouldn't go that far, clearly not as good as the long established New Zealand and Australian arms but the bulk of the US stores are trading profitably after a very short time opened and the UK unit has been trading profitably for a couple of years.

When establishing a new retail chain, initial loses are to be expected, due to set up costs and until economy of scale is reached and one would expect those stores that are already operating profitably to pick up margin wise once established for a longer period.

The time frame for analysis of a company by broking houses is notoriously short term and while short term indicators are of definite interest to gauge company health on a half year to 12 month basis, it is the long term prospects for a company that should be the primary interest to an investor. Especially when it is a growth company like Pumpkin Patch.

Directors of Pumpkin Patch commented on their business outlook and strategy when reporting the Full year NZ$27.6 Million 2007 profit last August, down from 28.5 million from 2006:

While interest, store opening costs and local market development costs would continue to have an impact on financial results in the short term the directors and management team were confident current strategies would the best long term financial outcomes...

Something I would concur with.

All listed companies with substantial overseas profit and revenues have been marked down over the last 6 months or so. Two other such notables are Fisher & Paykel Healthcare Ltd [FPH.NZX] and Fisher & Paykel Appliances [FPA.NZX]

Both of these companies are well run and Fisher Health has excellent long term prospects, but their market caps have taken a beating of late.

Pumpkin Patch is currently facing toughish times during a strong growth period but it isn't going to last. How long it will last is hard to say but things are not as bleak as some brokers might have you believe.

ABN Amro and other New Zealand brokers who downgraded Pumpkin Patch today all have shareholdings in the New Zealand Stock exchange and ABN recommended NZX as a "buy" today.

I wonder if they are short on Pumpkin Patch?


Disc I own PPL shares in the Share Investor Portfolio


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