Restaurant Valuations to Fall Further

Restaurant investor Roger Lipton talks about the pain of the current financial crisis.

By David Farkas, Senior Editor -- Chain Leader, 9/22/2008 10:59:00 AM

As an uncertain week begins, a week that sees Congress voting on a $700 billion bailout proposal of the country's largest investment banks, Chain Leader sought out New York-based money manager Roger Lipton for a restaurant perspective on the financial crisis.
 
Lipton, founder of Lipton Financial Services and a former Arthur Treacher's franchisee, has been investing in restaurant companies for 34 years. Today, he is all but out of the stock market, hoarding cash. Why so bearish? "I have never seen an economy around the world as uncertain as the current one," he says.

What's your reaction to [Treasury Secretary Henry] Paulson's announcement Friday that the government proposes to buy illiquid assets from troubled financial firms?

It is necessary, but it's not going to be sufficient to protect the world from this massive de-leveraging that must take place. That has to run its course. 

Do you see this as merely one solution for a time and then there will be another government solution?

There will be ongoing distortions to the financial world that are impossible to predict. The more government gets involved, the greater the number of distortions that are guaranteed to take place.
 
What will be the impact on restaurant stock valuations?
 
A continuing weakening of the economy will affect the restaurant industry and in turn their stock valuations, just as it affects all companies around the world.

How far will valuations fall for the larger cap, better-positioned restaurant chains?

It's impossible to say. All I can say is, given the money I am managing, I've never been so liquid or so bearish. In essence, I am out of the market. At this moment I am in cold, hard cash.

How tough it will be for franchisees of these larger chains that depend on credit to expand?

Capital still flows to businesses that generate high returns. It's just that returns will have to be even higher than they used to be. And the capital will be more expensive than it used to be. But the best concepts in the business will attract capital. The funny-money times are behind us.

The media focuses on the Dow as a bellwether of economic good or bad news. Given that restaurant stocks, except for McDonald's, are not part of the Dow, do you think the Russell 2000 or the Wiltshire 5000 gives investors a better picture?

Most restaurant companies are small to midcap. So for my purposes, the Russell 2000 is the best analog for comparisons.

If you could have one question about the future answered today, what would it be?

The key question is, what will we be able to buy with stock certificates and other assets three to five years from now. For a million bucks, will we be buying lunch or Manhattan Island? I don't think anyone has the answer. I am just trying to stay liquid.