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Author: wax Big red star, 1000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 766  
Subject: PSUN - Swimming With Sharks Date: 3/5/2003 7:36 AM
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I'm always looking for a bargin, so when I saw LouAnn's article on Pacific Sunwear, I thought, why not? According to the article they seem to be doing all the right things, so let's check 'em out.

PSUN closed yesterday at $18.21 per share. That's gives the stock a P/E of 22 and pegs the company's earnings at about $0.83 per share. So to me, before I could even understand the company's business model, I knew the stock was seriously over priced.

That's when I checked on what the company insiders were doing. Guess what, they're selling. Since the first of the year, the CFO has sold 70,000 shares of stock at an average price of 19.50 per share. In addition, since the first of the year, the CFO has been granted 40,000 options at $9.89 per. In my mind, this tells me the company believes the value of the stock is $9.89, or about half of its $18.21 close for 03/04/03.

Alas, I pressed on, and came across some institutional information. I learned that in the last three months of 2002, the institutional owners of PSUN sold off about 25,025,176 shares while purchasing a mere 7,095,309 shares. That's about a 3.5 to 1, institutional sell to buy ratio.

Again I asked myself why would anybody want to own this stock?

So I looked at the balance sheet. That's when I knew my suspicions were fairly accurate. Cash declined year over year by 23%. Receivables increased year over year by 125%. Long term debt increased by 230%. Like I said, why would anybody want to own this stock.

The economy is crawling, I mean if it weren't for the early spring storms, it would fall over! And yet, the analysts that follow this company are predicting a 15% increase in earnings! That's almost twice what the normal average has been since 1929!

So, what is a reasonable value for PSUN? I have no idea. But I do know that it has a current book value of about $5.80 per share, and a value based on the company's $0.21 free cash flow of about $3.55 per share.

My point with this post is just to remind folks that price determines return, the more you pay the less you make.

In the case of PSUN, based on its closing price if $18.21 on 03/04/03, the stock has an upside potential of $0.36 per share, and downside risk of ($8.93).

So for those of you that enjoy the thrill of swimming with sharks, this stock may be your cup of tea. Just remember that sharks have big teeth, and aren't always interested in who they eat.

Wax
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