Who doesn’t love dining out? Eating at home is one thing… but you have to cook and clean and it seems to take forever. Eating out is more fun! And it’s REALLY fun when you don’t have to pay the bill!
A few years ago, it seemed like everyone had an expense account.
Entertaining clients meant going to a fancy restaurant… Consuming an “over-the-top” meal… Then arguing over who picked up the bill. Everyone knew it was being paid for by an expense account!
The dinners always started with drinks in a bar. Nobody cared about the $20 charge for a single drink. Once seated, dinner started with seafood appetizers. Then wine was ordered. Nobody was flinching at the prices. “$300 for a bottle of wine? No problem, order two!”
Thick steaks of Prime grade beef, lobster tail sides, more food than anyone could consume. Then came desert and of course after dinner drinks. On particularly fun nights, everyone would move to the bar after dinner… and close down the place.
Nobody had bigger expense accounts than the investment professionals on Wall Street. Fees were so big, dropping $4,000 on a dinner was a rounding error on an expense account.
Of course, the good times didn’t last… they never do.
The recession put an end to excessive spending. Expense accounts were pulled… client dinners cut back… and the good times were relegated to memory status.
A number of high end restaurants took it on the chin.
Expansion plans were shelved. Growth rates slowed, and in some cases turned negative. Costs were cut to the bone, and profitability suffered.
Now, the pendulum is swinging once again.
Five years ago most steakhouses were packed. Two years ago they were empty. Now the crowds are starting to return. Pocket books are starting to open up again. And the joy of the high end steakhouse dinner is coming back to life.
And that’s the genesis behind the next hot stock pick.
The steakhouse industry is seeing a sort of revival. No, we’re not anywhere close to the good times of 2007… but things are looking up. And this is the precise time you want to swoop in and buy up shares of these companies.
Once the economy really gets going, the profits are going to jump, and the stock will race ahead. We want to be on board well before that happens.
So without further delay, let me introduce you to Ruth’s Hospitality Group (RUTH)
COMPANY DESCRIPTION
Ruth’s Hospitality Group owns and runs the popular restaurant chain Ruth’s Chris Steak House. They also own the Mitchell’s Fish Market and Cameron’s Steakhouse restaurant brands. These restaurants are everywhere… and you’ve probably enjoyed a fine meal at one of them.
Ruth’s Chris Steak House has 131 locations, with 64 of these restaurants company-owned. They’ve franchised the others. The company has even expanded overseas with 14 international locations in emerging markets like China and Taiwan.
The restaurant was founded in 1965. And it is now one of the largest upscale steak house restaurant chains in the United States.
The company is well known for its high-quality food, focusing on serving USDA-graded prime beef. Ever wonder why the steaks are so good? You’re not going to find these cuts in your local grocery store. The beef they serve is in the top 1% to 3% of everything produced.
But this grub doesn’t come cheap.
USDA prime beef carries a price premium. And customers are happy to pay. The average check per diner is a whopping $70. Now, I’m not going to get into all the details of running a restaurant, but I do want to look a little more closely at their business…
RUTH’S BUSINESS
The business outlook is fantastic for RUTH. Consumer confidence, despite a recent hiccup, is near its highest level since May 2010. And it means consumers are more comfortable with their future and the direction of the economy.
The increased optimism is a good thing.
It’s clearly driving customers back to Ruth’s. To see this yourself, look no further than the company’s recent quarterly report. Same-store sales increased by a hefty 9.2% during the last quarter of 2010!
Now, it’s important to note business travelers (and their expense accounts) make up a substantial segment of RUTH’s customers. They are frequent visitors to upscale steakhouse restaurants.
And we’re seeing a rebound in business travel.
Business travel is expected to increase by 6.7% this year, and 2012 is projected to grow even more. It’s simple numbers… more travelers means more customers… and that means more revenue for the restraunt chain!
There is a risk…
For those of you following the economy closely, you’ve no doubt seen the rising threat of inflation. Why is this relevant to investors? Because in case you haven’t noticed, commodity prices have been skyrocketing lately. Just take a look at the jumping price of gas over the last few months.
But higher gas prices won’t directly impact Ruth’s. What will hit them is rising commodity prices. The cost of grains is marching higher… and that’s what their prime beef eats!
Should you be concerned?
That’s a great question, and my only response is – Maybe. See, high end restaurants have a unique pricing power. I believe RUTH’s will be able to increase prices to customers and pass along those costs.
Think about the business customer on an expense account… he’s there to entertain clients. If a drink or a steak costs a dollar or two more, is he going to get up and leave? No. Of course not.
Ruth’s pricing power will save their margins and ultimately their bottom line.
Ruth’s Chris Steak House has already projected an increase in prices of about 0.5% in 2011. But, prices aren’t the only thing growing….
Management intends to grow the franchising business and currently has 17 outstanding commitments for new locations. After putting a hold on expansion plans during the recession, the thought of growth is quite refreshing… and something shareholders will applaud.
Clearly this $5 stock is poised to see huge gains! But before we jump in, let’s look at their recent financials…
RUTH’S FINANCIALS
The fourth quarter of 2010 was a strong one for Ruth’s. Revenue increased 7.7% over 2009 to $94.1 million. Now, the fourth quarter is always an important one. The first and last quarters of the year typically see higher levels of activity and revenue due to consumer spending during the holiday season.
The recent increase in revenue helped RUTH return to profitability in the fourth quarter!
The company generated $3.9 million in net income which is a huge turnaround from the net loss of $2.7 in the fourth quarter of 2009. It’s a substantial year-over-year gain for RUTH… but more importantly it shows the business is heading in the right direction.
On an annual basis the numbers are still strong. Revenue for 2010 was $357.6 million. And net income was a solid $13.4 million. It’s an increase in earnings of 458% from 2009 levels.
Ruth’s is scheduled to report the first quarter 2011 results around the 18th of April. And I’m expecting good things.
Now, let’s take a quick look at the stock…
ANALYSIS OF RUTH STOCK
The first thing to jump out at me is the ownership… There are some serious “Smart Money” Investors in this stock.
In fact, one of the world’s largest investment institutions owns a massive stake in RUTH. The group I’m talking about is none other than Fidelity… they own 15% of the company – or about 5.2 million shares.
But Fidelity is not the only major investor noticing RUTH’s potential.
BlackRock, another member of the “Smart Money” crowd, also holds a major position of nearly 5.2% in RUTH.
RUTH doesn’t pay a dividend, but that’s “OK”.
The real value of this stock is in its future potential. Right now it trades at a P/E ratio of around 15x. As a comparison the S&P 500 trades around a P/E of 15x. Clearly the company’s not under or over-valued.
But what’s overlooked in my mind is the improvement in customer traction, higher revenue, the rebound in earnings, and the growth potential the company has. When all these cylinders are firing, we’ll see not only strong earnings, but a jumping stock price to boot!
The rebound is already starting.
Just take a look at the stock’s recent performance. In the last 6 months, RUTH shares are up more than 28.6%. Let’s jump on board this train before it leaves the station!
Chart courtesy of StockCharts.com
ACTION TO TAKE
If you like what you’ve read, do your own research… then Buy RUTH up to $5.40 a share.