Monday, November 03, 1997

WSMP Inc.
(Nasdaq: WSMP)
Phone: 704-459-7626
Price (10/31/97): $21

HOW DID IT DOUBLE?

Yee Haw! For food processor and Western-themed steakhouse operator WSMP, wrangling up a Double has left investors with a fistful of dollars. Major deals have branded the stock a winner as new products and a new strategy finds the prospects as bright as a sun that just won't set.

Back in August the stock began inching higher and the company imposed a poison pill plan to prevent a hostile takeover. With speculation that a suitor was in the wings, shares of WSMP continued higher -- probably well above what any possible buyer wanted to pay for the company.

A month later the company had a pair of interesting announcements. The first was that it would be teaming up with Carl's Jr. parent CKE RESTAURANTS (NYSE: CKR) to introduce a retail-line of Hardee's breakfast biscuits. Then it announced it was going to acquire the struggling Sagebrush Steakhouse & Saloon chain. The first move would bolster a food production division that was already a major player in cured hams and baked goods. The latter was a tactical move with the intent of replacing all of its eateries with the more upscale Sagebrush theme.

Forget the good, the bad, and the ugly. For WSMP it's all been good. Giddy on up.

BUSINESS DESCRIPTION

WSMP can be defined by its moniker. The WS stands for Western Steer, the company's flagship budget buffet and steakhouse restaurant chain with 79 locations, 32 of them company owned. The MP stands for Mom & Pops, which is the food processing subsidiary.

Through Mom & Pops the company produces more than half a million cured hams annually for institutional sale to other restaurant chains. The company also makes biscuits, rolls, and biscuit sandwiches that it sells to restaurants and supermarket chains.

FINANCIAL FACTS

     Income Statement
      12-month sales: $100.8 million
      12-month income: $1.4 million
      12-month EPS: $0.39
      Profit Margin: 1.4%
      Market Cap: $77.7 million

      Balance Sheet
      Cash: $0.6 million
      Current Assets: $16.3 million
      Current Liabilities: $13.6 million
      Long-term Debt: $11.2 million

      Ratios
      Price-to-earnings: 53.8
      Price-to-sales: 0.77

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Few companies have managed to marry life on the grocer's shelf with that of a restaurateur successfully. WSMP proved to be one of the few. The economies of scale would seem logical. A company with baking facilities capable of providing bread lines to supermarket chains and institutional foodservice has a cost advantage in providing its own baked goods. The same goes for the cured ham division.

When catering to a slaughtered smorgasbord sector where companies like Ryan's and Buffet's are struggling and Sizzler became an all-you-can-eat to everyone but its creditors, the slightest of margin savings can mean the difference between profit and loss.

The advantage became clear and margins began to expand this year when earnings for the first six months went from $0.08 a share last year to $0.24 this time around. For the last quarter the company went from breakeven to a gain of $0.16 a share.

All along the way the stock has inched higher -- a diamond horseshoe in the rough.

WHERE TO FROM HERE?

WSMP has navigated a path through the minefields with amazing success. Just as companies like Boston Market are losing money opening restaurants to provide home cooked grub, WSMP is doing quite nicely in the home-meal replacement segment by selling its prepared meals at the grocery store. While Hardee's is hoping a new owner will bring its fast food chain out of a financial rut, WSMP is taking the best the chain has to offer, its morning breakfast sandwiches, and is well-positioned to win big selling them in supermarkets.

The future holds what could be an even bigger surprise. Once the acquisition of Sagebrush is completed, the company is considering converting all of its Western Steer and Prime Sirloin locations into Sagebrush Steakhouses.

While Sagebrush has been yet another weak publicly traded casual steakhouse concept, it has produced consistent profitability and is being bought out at less than its $7 per share IPO price tag last year. Since WSMP has thrived in a segment where everyone else is losing money, it can quite realistically be expected to flourish in a niche that is struggling, but where the likes of Lone Star Steakhouse and Outback have at least remained in the black. Trading at close to 30 times next year's earnings estimates does not make the stock the same bargain it was before, obviously, but between the Sagebrush upgrade and the new supermarket product lines, those estimates may soon rise -- as this cowboy rides off in the stockrise.

-Rick Aristotle Munarriz, (tmfedible@aol.com)


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