Large debt load … a catalyst for a higher stock price

A few thoughts for tonight

It makes sense that a large debt burden could be a motivating factor to improve productivity by forcing lower costs and executing a more selective approach to capital expenditures or acquisitions.

But to help avoid an investment mistake I want to stay with companies posting strong historical FCF but has a depressed stock price do to current earnings below expectations or historical profitability.

These were some of my search criteria;

1) No dilution and a share count that has been stable over the past 3-4 years. So my first filter was:
*Average share count last 3 years / Share count over the past 12 months >1.00

2)Large debt relative to total capital structure:
*EV{(Price+Total Debt)-(Cash)}/Price >4.00

3)Low administrative costs as measured by selling general and administrative costs as a percentage of total annual revenue.
*Annual SGA/Rev<.15

4) Postive FCF over the past 5 years demonstrating debt carrying capacity

5) Increasing total equity value over the past 4 years

6) Positive cash flow from operations over the past 12 months as a measure operational health regardless of the temporary poor bottom line results relative to historical performance

7) EV/Sales <1.90

8) Current price 75% below the 5 year high and a negative price return over the past 3 years.

9) Positive insider buying over the past 12 months

Two of the ideas that I’ve selected were as follows:

DPZ (Domino's Pizza) $7.38

DPZ is a pizza delivery company that has locations in all 50 states and in more the 60 countries. 90% of their stores are owned and operated by franchisees which reduces risk and maximizes free cash flow.

Although this has no influence on my thoughts, George Soros was recently buying according to gurufocus.com



Price to sales is selling at a discount of .30 for the trailing twelve months versus 1.0 for 2004.

Price to cash flow is trading at a trailing twelve month of 4.7 versus 12.10 for 2004.

Great historical ROIC; 2008 – 2004 = 26.34%, 17.75%,70.83%,62.10%,35.36%

PTRY (Pantry Inc) $14.27

Pantry is a convenience store operator in the Southeast, with more than 1,600 stores in 11 states. 373 locations coupled with the corporate headquarters are owned.

P/S, P/CF, P/B are at a discount to their historical measures. One year return is -38% and 79% off the 5 year high.

Neither one is a micro cap but the approach can be used with smaller companies.

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