You are right this business is reasonably solid. It does...

You are right this business is reasonably solid. It does generate free cash flow over the long-term. But there are definitely lots of earnings risks and one of them is becoming more and more obvious with each report / earnings upgrade.

The elephant in the room is the big WES / WOW supermarket duopoly that is really squeezing PFL's margins at the moment. If CCL is being squeezed, then almost everyone else that deals with the duopoly is going to have a problem. There isn't really anything they can do about it, except cut costs and try to diversify earnings.

Gross margin for instance has dropped from 43% in 2005 to 38.1% in 2012 and I can almost guarantee it will be lower in the next report. Check the latest earnings update announcement for confirmation of the margin pressures they are facing. Working capital as a % of revenue is also growing steadily. EBIT margin has fallen from the low 20%s to 13.3% as well.

Cutting costs is OK in the short-term, but it is like living off the smell of an oily rag, it only lasts so long before you run out of fat to burn and need to find a new way to maintain margins. It's a pet "go to scheme" of company directors, but how often does it actually see results?

They have also spent capital investment in upgrading their factory machinery. So far this has meant that returns on capital have taken a hit. I am not convinced that this is just a short term phase. ROIC has gone from 43% in 2005 to 23% in 2012 and there is no sign of the decline of returns abating.

Diversifying revenues is another way that they can increase or at least maintain profitability - and they are trying to do that with out-of-home / convenience store sales. The main problem here is some of their main focuses (ie petrol stations) are also owned by WES / WOW. The duolopy is omnipresent in Australia and it will be hard to avoid their clutches.

Would be happy to hear some ideas of how they can grow earnings and maintain margin profitability throughout these challenges? How can they gain pricing power over WES & WOW to restore former profit margins? Brand awareness certainly does not seem to be enough on its own.

Earnings risks and the issues with diversifying revenue all considered, I am not sure that this is cheap enough on valuation grounds to get me interested on the current evidence.