Luby’s (LUB), founded in 1947, is multi-branded restaurant that includes Luby’s Cafeteria, Fuddruckers, Cheeseburger in Paradise, and Luby’s Culinary Contract Services. Its 181 restaurants are grouped into traditional cafeterias (94), gourmet hamburger (66), casual dining /bars (19), one upscale fast-serve chicken restaurant, and one seafood restaurant. Lastly, Luby’s is a franchisor for 114 franchised Fuddruckers restaurants. The owners of these franchise units pay royalty revenue.
Late last November, Luby’s stock traded as high as $8.98 but since then it has pulled back 76% and is down 31.3% so far in 2014.
This situation presents an attractive entry point for the following reasons:
• The stock trades at a discount to the company’s break up (book) value;
• 30% of outstanding stock is held by insiders and management, with an additional 46% held by institutional investors;
• Insiders have been increasing their stake—always a positive sign;
• Buildings and land are stated on the books at cost and a significant discount to market value. Over 50% of the company’s properties are company-owned, and Fuddruckers was acquired in bankruptcy at a discount during 2010;
• Luby’s and Fuddruckers restaurants are disproportionately concentrated in Texas, particularly Austin, Houston and San Antonio where the economy and real estate prices are strong.
To be fair, operating performance in the last 2-3 quarters has been unsatisfactory with negative operating cash flow in the last two quarters. However, that can be understood in the context of the company’s attempts to turn around underperforming restaurants.
In the last three years, the company has generated $80 million from operating activities. Luby’s has been profitable the last three years in a row: 2013: $3.2 million, 2012: $6.8 million, and in 2011: $2.9 million.
Buy Luby’s at market up to $5.75 with 15% trailing stop loss in place.
Carl Delfeld, The Value Bounce, www.thevaluebounce.com, 800-250-9657, May 25, 2014