Lane Cardwell

Marked Down

Everyone loves a sale. I mean if you could buy an iPod for $15, that last year was selling for $150, wouldn't you be all over that? Or, if you could buy a new Lexus for $7,000, instead of last year's price of $70,000, wouldn't you be tempted to buy two or three? That is what is going on with restaurant companies at this very minute. Not all of them are marked down 90%, but you can sure get some good deals out there.

Funny thing about buying companies is that it seems that people only want to buy them when they are fully priced, and nobody wants to buy them when then they are at fire sale prices. We're not talking about replicas, copies, or black-market versions of these restaurant companies, like a Coach hand bag purchased in the back of a store. These are the real thing. 

First, let's review the terminology of buying a public company. If you multiply the number of shares of stock that are available (I hesitate to say "outstanding" since at these prices they clearly are not outstanding) by the price of the stock you arrive at the market capitalization of the company. This is the value of all of its stock at current prices. Just because a company's stock is selling for $10 doesn't mean that you can buy all of the stock for only $10/share. The shareholders will expect a premium. This premium can range anywhere from 15% to as high as 75%, depending upon the circumstances of the company, and how long the stock has been trading at that level. Maybe even more.

If you are planning on buying a company, the market capitalization is just the beginning of what you are paying. If you buy all of the stock and own the company, you also own the debt. In simplistic terms, ignoring a couple of adds and subtracts, adding the market capitalization value to the amount of debt gives you the enterprise value. This is a truer value of the company than simply the cost of buying up all of the stock. Let's take a look at some of the bargains out there.

Brinker International: Here's a chance to start off near the top of the food chain in casual dining with concepts like Chili's, On The Border and Maggiano's. At the close of business on November 20 the stock was worth $484 million. Sounds like a lot? Within the last year you would have paid as much as $2.4 billion. Within the past two years it was $3.5 billion. Better act fast. But don't forget the almost $900 million in debt that you will be responsible for.

Cheesecake Factory: Great company with great concepts. $318 million, plus tax, title and delivery and you can drive this fine company home. Within the past year you would have paid $1.5 billion. At today's price you can even afford to spring for the extended warranty. Even adding in the $328 million in debt you are getting a really good deal.

DineEquity: Two great brands for one great price. Buy this one and you own one of the leading family dining chains, IHOP, and the largest casual dining chain, Applebee's. $130 million today, and just September of last year it was selling for $1.2 billion. But don't forget the debt! It's over $2 billion.

Ruby Tuesday: A brand that has just spent $70 million updating its restaurants, and two years improving its food. This is not a fixer upper, but it is at a fixer upper price of $57 million for all the stock. With that you get almost 1,000 restaurants and a worldwide presence. You also get about $500 million in debt, but it is still cheap. After all, within the past two years you would have paid $1.6 billion for all the stock.

Ruth's Hospitality Group: The owners of Ruth's Chris Steakhouse and Mitchell's Seafood, this fine company has been marked down to $21 million. Within the past year you would have paid almost $300 million for the stock. Even with debt of approximately $150 million, you are still getting the largest prime steakhouse chain in the country.

You get the idea. These are some of the more dramatic values out there but you can just about close your eyes, point at a restaurant stock, and know that you are going to get one of the best prices for the company in the past several years. And have you been reading about the long lines of buyers for these marked down companies? Neither have I. They must be waiting for the prices to go back up. After all, who would want to tell their friends that they paid $7,000 for a new Lexus?

Posted by Lane Cardwell on November 20, 2008 | Comments (6)