Ruby Tuesday Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ruby Tuesday (NYSE: RT  ) topped The Wall Street Journal's survey of the day's worst decliners Friday -- down 14% when all was said and done.

So what: And the company has no one to blame but itself. In addition to missing the Street's earnings estimate by a dime yesterday, management warned that fiscal 2012 won't be so hot, either. Fiscal Q4 2011 brought Ruby just $0.21 per share, and management's projecting about that much in earnings per quarter all through the current fiscal year as well. Best case: $0.85 per share, but perhaps as little as $0.75.

Now what: Pretty miserable news, right? No wonder folks are selling. But hold up one sec before you, too, head for the exits. Yes, Ruby's earnings disappointed. Yes, it ended fiscal 2011 with just $46.9 million in profits. But according to management, the company's actual free cash flow was quite a bit more than that -- $90 million. Even better, management promised to maintain or even improve on that FCF number this year, despite increased capex spending that's needed to spruce up its restaurants and give them a more upscale feel.

Result: Post-sell-off, we're now looking at a company that sells for barely 6 times free cash flow yet projects flat-to-10% FCF growth in the current year and is pegged for 13% long-term growth by the analysts who follow it. Does that sound to you like something that deserves a 14% selloff?

Doesn't sound that way to me, either.

So who's right? Rich, or the investors who waved goodbye to Ruby Tuesday today? Add the stock to your Watchlist and find out.

Fool contributor Rich Smith holds no position in any company mentioned. Check out his holdings and a short bio. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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