3 More Restaurant Names Worth Chewing Over

 | Dec 04, 2017 | 10:00 AM EST
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Last week, I offered up a few names that might be interesting acquisition plays in the restaurant space. The sector, which has been ripe for consolidation, has had a challenging year. With the S&P 500 up more than 20% year to date, the average return for restaurant stocks with market caps greater than $100 million is just 1%. Raise the minimum market cap to $1 billion and the average return is 6.5%, which is still well below the broad markets, but it gives an indication that the smaller stocks in the sector have had a tougher time. Some could be cheap enough, interesting enough, or have operating issues that are seen as fixable in the right hands.

There are any number of names that could end up in the crosshairs of potential acquirers, and private equity certainly has exhibited a hunger for restaurants over the past few years. Germany's JAB Holdings has been putting together a solid brand portfolio with the likes of Panera Bread, Krispy Kreme, Einstein Noah and coffee-related names such as Keurig Green Mountain, and Peet's Coffee & Tea. Whether JAB will continue to add to this portfolio and to what area of the restaurant sector remains to be seen. It seems to have breakfast pretty well covered, for sure.

Keep in mind that this is pure speculation on my part; while I've gravitated toward and owned names that I believed could be targets (Ruby Tuesday (RT) , Bob Evans Farms (BOBE) , Krispy Kreme, all in the restaurant space), it does not always work out as expected. In Ruby Tuesday's case, the company is being acquired at a price well below my expectations.

Names such as Denny's Corp. (DENN) and Red Robin Gourmet Burgers Inc. (RRGB) could fit the bill (I don't own either at this point, but have in the past). The all-but forgotten Denny's quietly has fought its way from bankruptcy back to legitimacy over the past several years, moving more toward franchising and away from company-owned stores, and it has been increasing its international presence. The company also has been aggressively repurchasing shares. This under-the-radar, profitable chain of 1700-plus stores has an enterprise value of about $1.1 billion.

Red Robin, which was the subject of major activist activity back in 2011 and thrived in the ensuing years, was back in the headlines last month after posting worse-than-expected third-quarter results. Earnings missed the consensus estimate of 29 cents a share by eight cents and the stock suffered a 29% pullback. The stock is now down 13% year to date and the damage may not be over, as investors and analysts sour on the name. Still, it is a solid brand name. Not exactly cheap at 18.5 times next year's earnings, Red Robin still might become attractive with its 550 locations and $900 million enterprise value.

One other small name I recently was asked about is Luby's Inc., (LUB) , which has been sucking wind for years. I still hold a position, primarily due to the company's Fuddruckers brand and its real estate ownership. The company owns the land and buildings for 65 Luby's locations and 22 Fuddruckers, yet has a very small enterprise value of just $108 million.

While cheap (to me, anyway) on an asset basis, the Pappas family -- brothers Harris (former COO, age 73) and Christopher (current president and CEO, age 70) -- together own or control nearly 35% of Luby's stock, so any sale likely would need their blessing. The company, which has not had a profitable year since 2013 (while Chris Pappas earned more than $700,000 last year), should be sold, or perhaps parts of it. While for now I am holding on to a small but underwater position, I am not holding my breath.

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