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Rib Eyes and Stock on the Menu at Texas Home-Style Restaurant Chain
By Michael Brush
Exclusively for InvestorIdeas.com
July 10, 2008
Slammed by rising food costs -- plus higher gas prices and worries about the economy that have families rattling the pots and pans in their kitchens once again -- restaurants are among the biggest losers in the current market rout.
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Case in point: Not even the chicken fried steak platters or tasty Texas rib eyes are enough to keep bringing ‘em in at Luby’s (LUB), a cafeteria-style casual dining chain in Texas that prides itself on making food from scratch.
Restaurant sales were off 4.1% in the most recent quarter. Net income slipped to a mere $949,000 from $3.9 million a year before – or three cents a share vs. fourteen cents a share a year ago. Luby’s has actually been suffering 2.6% quarterly sales declines on average for five quarters now, following three years of average quarterly growth of 4.6%.
And no surprise here: Its stock has been virtually sliced in half since October, to trade recently at $6 a share.
Down at these levels, though, Luby’s CEO has developed a robust appetite for his company’s stock, and it’s not hard to see why. Since the middle of June, CEO Christopher Pappas has purchased $989,000 worth of Luby’s stock. Insiders hold about 30% of the stock in this company, which has 123 restaurants – virtually all of them in Texas.
Let’s take a look at why the Luby’s CEO has put his own company’s stock so high on the menu.
- Cheap valuation. The stock trades for a price to sales ratio of .56 and a little below book value. To put that in context, McDonald's (MCD) has a price to sales ratio of 2.87 – though I’m not suggesting Luby’s will ever trade for the same valuation.
- Financial strength. Luby’s is the kind of stock you want to own, if you have the courage to venture into the troubled waters of the economy as an investor. By this, I mean that Luby’s has the financial strength to not only survive, but to continue tweaking its business model so it can be well-positioned when good times return. The company has 60 cents a share in cash and a minimal amount of debt. But there’s more financial strength here than meets the eye. The company owns the property on which 89 of its 123 restaurants are located. It also had operating cash flow of $25 million in the past twelve months.
But these are just starters. More importantly, Luby’s is using that financial strength to continue improving its business model, while weaker competitors are on the defensive.
Preparing for the rebound
“Luby's is profitable, debt free, and generating cash flow, which we are investing back into our business,” Pappas told investors in the most recent conference call. “Our belief is that once the economic weather clears, Luby's should be well positioned to perform better than many of the industry averages.”
Much of this involves the mundane minutia of operating restaurants – the small stuff that can make all the difference to customers.
- For example, Luby’s is upgrading and remodeling restaurants – doing things like putting in new tables, chairs and booths.
- Last quarter it finished installing software that helps out in the kitchen – software that does things like display recipes on kitchen monitors along with pictures of the meal. This improves consistency across the chain, and makes it easier to introduce new eats. It also helps reduce waste and improve inventory management.
- The company is also still opening new restaurants, despite the downturn. “Hopefully one advantage to the current economic environment may come on the real estate side as prices will likely soften and may present new location opportunities for Luby's,” says Pappas.
- The company is also using technology to improve labor deployment and reduce overtime.
Hospital food
Besides its restaurants, Luby’s has a line of business that prepares food in health care facilities. This is still a relatively potatoes. The business produced $1.8 million out of $74.6 million in the most recent quarter.
But it is growing rapidly. That $1.8 million in revenue last quarter was a huge increase over the $363,000 from this line of business a year before. Over the next six to twelve months, the company expects to win two or three more contracts, and they could be big.
This culinary services business, as it is called, has some advantages in that the company doesn’t have to build new restaurants. Plus contracts tend to last for several years, and there is a “captive” audience, Pappas said in the most recent conference call. “We are not competing with every brand on the street as we are with our restaurants,” he said.
Insider update
This week saw continued large insider buying at five stocks recently featured in Insiders Corner. They are: Entercom Communications (ETM) and Sinclair Broadcast Group (SBGI), Valeant Pharmaceuticals (VRX), Dick's Sporting Goods (DKS), and Contango Oil & Gas (MCF).
The bottom line: In a weak economy and terrible stock market, insider buying backed by financial strength can be a winning combination. That’s what you have with Luby’s.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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