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Peter Lynch

Pier 1 Imports/Sunbelt Nursery
1991-
Industry: Furniture
Category: Franchise

Context
In 1991, Lynch saw that home purchases were recovering. He figured he'd buy a Pier 1 because new homes need new furniture.
Intermark owned 58% of Pier 1's shares, and had rejected offers for $16/sh because they wanted $20/sh.
Intermark eventually became strapped for cash and was forced to sell their shares for $7/sh. They went bankrupt anyways.

Why the Company is Mispriced
CEO claimed that the company's market was not saturated, they had 300 stores and could continue to grow at 25-40%.
Analysts forcasted 1992 earnings at 50-60 cents, PE slightly less than 10x.

Alternative View
Lynch said this was a 15% grower with fairly well-managed debt and inventory.
Pier 1 also owned 50% of Sunbelt Nursery. They had spun off the other 50% for 30m.
Said that Pier 1 could earn 80 cents from it's own stores, plus an additional 10-15 cents from Sunbelt Nursery, for $1 in earnings per share, giving Pier 1 a 14x multiple, for a $14/sh stock.

Also noted that the garden nursery industry was the last mom and pop industry not swallowed up by a big retail chain.
Sunbelt Nursery was selling for $5/sh, had $2/sh in net cash, and was selling for 10x PE.
The company had 98 garden centers and was valued at $30m. Calloway operated 13 stores similar to Sunbelt, and was valued at $40m.
Admitted that Calloway was a superior operation, but Sunbelt had 5x Calloway's sales. If at a similar revenue multiple, Sunbelt would be worth many multiples over 30m.

Result
Lynch later admitted that his passion for the nursery companies was a giant mistake and he deluded himself.
He overlooked the fierce competition and the garden nursery business is as competitive as airlines. Most traffic goes to the Walmarts/Home Depots.
Sunbelt was eventually bought out by General Host at $5/sh.

Pier 1 never hit that $14/sh mark, floating at ~$8/sh for the next 3 years.
The share price spiked to $40/sh in 1998, $12/sh in 1999, and $50/sh in 2003.
I wasn't sure of Lynch's exit date, so I just took the share price in 2001, 10 years after 1991 ($20/sh), for a 300% return since 1991.
Hard to say what Lynch's actual return was. If you sold it within 3 years, you could've made a 10-30% gain.
If you waited 5 years, you would've made 500% at the peak.