S A ADVISORY January 1998
New Buy Recommendation

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NEW BUY RECOMMENDATION II - Payless Cashways, Inc.
(PCSH - Current Price $2 1/8)

The company, Payless Cashways, is the nation’s 5th largest retailer of building materials and home improvement products.

At present PCSH trades on the OTC-BB at around $2.12. In our opinion, this situation is extremely undervalued. According to filed documents by the company, the state book value is at least $9.00. At present there are 20 million fully diluted shares outstanding. According to a spokesperson at PCSH, management anticipates sales of $2.3 billion and net income of $8.3 million or .43/share. Based upon the share price of $2.12, PCSH sports and estimates a PE of only 4.9. In our opinion PCSH should trade at double that multiple or at least $4 to $6. Even at this price PCSH would still trade below its stated book. At present it trades at 78% below its stated book value.

It is obvious that as soon as the news gets out about this one, the major firms will start to initiate coverage on this opportunity. At present, visibility of PCSH is extremely limited and many cannot trade it or buy it due to its current listing. In our opinion, this will change within months!

The next paragraph is directly from filed documents and we like what we see!

“Since filing Chapter 11 just four months ago, Payless Cashways has successfully restructured the company’s financial position, resulting in a stronger, leaner company emerging with a balance sheet that supports our business, and a business that supports our balance sheet,” Mr. Stanley said. “As of the effective date of the plan, total liabilities are reduced from $1.1 billion to approximately $597 million ; balance sheet debt is reduced from $689 million to approximately $426 million. Under the plan, interest costs are reduced from more than $60 million in 1996 to a projected $29 million by 2002.”

As part of the restructuring, the company closed 29 under-performing stores and reduced its work force by 1,900 -- reducing operating expenses by approximately $80.3 million annually. Previously implemented corporate expense reductions will reduce operating costs by $7 million annually.

“Going forward with less debt and more financial flexibility, the new Payless Cashways will invest in the renovation and upgrading of its consumer stores in order to provide a broader range of product choices and a better shopping experience” Mr. Stanley said. “At the present time, our dedicated national sales force is concentrating on providing high levels of service to large-volume professionals company-wide and in Contractor Supply centers in select markets.” “Looking ahead to the year 2000 and beyond, our industry will have more participants than just two warehouse competitors. Nearly one million professional and do-it yourself customers shop our 164 stores in 20 states weekly. In our niche, targeting professionals and DIYers who prefer a no-warehouse store format, we believe we can and will be among the best building materials retailers,” he said.

“The stores operate under the names of Payless Cashways, Furrow, Lumberjack, Hugh M. Woods, Knox Lumber and Contractor Supply. Payless Cashways currently employs approximately 12,500 people in its stores, headquarters offices, and distribution centers.

We rate PCSH a strong BUY at current levels and believe that 100% - 200% upside potential exists during the next 12 months.

For more information call Greg Nelson at 1-800-269-9460


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