Wednesday, April 30, 1997

The Penn Traffic Co.
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Phone: 315-453-7284
Price (4/30/97): $6

HOW DID IT DOUBLE?

Followers of regional grocer Penn Traffic may be doing a double-take at this Daily Double. The stock has been sliding ever since it peaked above $40 less than three years ago. However, a well-regarded CEO appointment later, the stock now finds itself trading at more than twice its $2 1/8 bottom in mid-January.

Investors were used to hearing nothing but bad news from the Syracuse-based supermarket company. Back in the summer of 1995, with the stock already beginning to edge lower, the shares were slammed for a $7 3/4 hit when Penn Traffic announced lower quarterly earnings and Goldman Sachs downgraded the company. Last year found a strike at its dairy facility and the resignation of its CEO.

Then came Phil Hawkins. Regarded by many as the savior of California-based Vons, recently acquired by SAFEWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>, the fiery executive was seen as someone who would get the debt-laden morale-stricken chain on track. After all, in his four-year tenure at Vons, the company's stock increased fivefold.

On Thursday, March 13th, the day the Hawkins appointment was announced, the stock rose from $4 3/4 to $5 3/8. Over the next few days, as the media began to sing the praises of Hawkins and dismiss the reaper at Penn Traffic's door, the stock rose even higher -- going to $7 5/8 before settling back to $6.

BUSINESS DESCRIPTION

Based in Syracuse, N.Y., Penn Traffic owns more than 250 grocery stores in the Northeast under the names Big Bear, P&C Foods, Insalaco's, Riverside, and Quality Markets. The company also owns a wholesale food distribution business as well as dairy and bakery divisions. Last year the company shuttered Harts, its discount general merchandise store chain.

With the resignation last fall of President and CEO John T. Dixon for health reasons, the company began an intensive search for a replacement, which culminated in the March hiring of Hawkins.

Like most supermarket chains, Penn Traffic is debt-heavy in an industry known for low profit margins. While the company still has some room under a $250 million revolving credit line, there has been no relief in the heavy interest expense that has more than wiped out the company's operating profits. Although earnings estimates call for no end to the red ink through 1999, analysts have begun to raise their expectations that Hawkins will help trim costs and slow the projected deficits.

FINANCIAL FACTS

Income Statement
12-month sales:    $3.3 billion 
12-month income: ($41.4 million) 
12-month EPS:     ($3.81)  
Profit Margin:         N/A
Market Cap:       $65.4 million 

Balance Sheet
Cash:                 $51 million
Current Assets:      $520.9 million
Current Liabilities: $343.6 million 
Long-term Debt:     $1284 million 

Ratios
Price-to-earnings:    N/A
Price-to-sales:      0.02

HOW COULD YOU HAVE FOUND THIS DOUBLE?

The stock had doubled from its January low even before the Hawkins announcement. That might leave one to assume that either it was a natural recovery for a stock that had been beaten down over the years, or possibly that word was beginning to spread of the pending appointment of Hawkins.

An investor could still have profited from part of the move if she was familiar with Hawkins's history at Vons. This was not a halted stock that vaulted in a split-second. The day the company issued the news of the Hawkins hiring the stock only inched up to $5 3/8. It was over the next two trading days, once the media had a chance to pick apart how successful Hawkins was at turning Vons around, that the stock soared another couple of points.

WHERE TO FROM HERE?

Penn Traffic is not Vons. Its problems run much deeper, as the debt is so mountainous that the company sports a negative book value. If Penn Traffic can be saved, and that remains to be seen, Hawkins is definitely well suited to try. His dedication to raising employee morale through empowerment, and yet ruthless attention to trimming overhead and sparing no one, is a beautiful contradiction that could be the proper tonic for Penn's woes.

On the surface this is still the same company with more than $3 billion in annual sales that was trading at $35 less than two years ago. The layers beneath paint a much grimmer picture of a company drowning in loan installments as it tries to increase sales and earnings. Hawkins has walked this road before, but not in a situation where debt has swallowed the shareholder equity whole and where labor woes, highlighted by last year's strike at Sani-Dairy, are as rampant.

So, another double? If Hawkins succeeds, it is certainly within reason. However, there is also the risk of Hawkins running out of time as the company runs out of resources. Lightning can strike twice, just make sure you are not parked under the bolt when it hits.

-Rick Aristotle Munarriz (TMF [email protected])

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