Ignite Restaurant Group Is Not Built Like a Brick House


Source:  Ignite Restaurant Group

You know a company is trying to put its best foot forward when it begins its earnings report by talking about the tiniest segment of its business  . Such is the case with Ignite Restaurant Group (NASDAQ: IRG  ) . No matter which way you look at it, the company's shares appear drastically overvalued, especially in light of developments from Darden Restaurants (NYSE: DRI  ) .

The crabby results
Ignite Restaurant Group's Joe's Crab Shack is its own version of Darden Restaurants' Red Lobster. On April 30, 2014, Ignite reported its fiscal first-quarter results. Its Brick House Tavern chain saw sales explode 10%, but sales at its Joe's Crab Shack dove 6% and Macaroni Grill's sales slid 4.1%. What Ignite didn't is that out of its over 300 restaurants,  only 20 of them are Brick House Taverns yet the company reported its Brick House Taverns gains first as if it were the main part of its business.  Adjusted net income per share for the company, meanwhile, was a mere penny.

Ray Blanchette, CEO of Ignite Restaurant Group, blamed "severe winter weather" for the company's shortcomings and stated that Joe's Crab Shack "felt the greatest impact from weather." The weather probably affected Joe's, but with a 1% increase for full-year 2013, Joe's Crab Shack wasn't exactly showing much in the way of impressive growth prior to the winter.

Source: Ignite Restaurant Group

The lobster trap
Darden Restaurants owns Red Lobster (which it is selling), Olive Garden, and a multiple other restaurant concepts of other restaurant concepts. Similar to Ignite Restaurant Group, Darden Restaurants' weakest restaurant concept was the seafood restaurant. Darden Restaurants reported an 8.7% decline in same-store sales with a double-digit plunge in guest traffic. It was worse than the performance at Joe's Crab Shack, although Eugene Lee, COO of Daren Restaurants, blamed the company's weakness in part on a failed promotion that was specific to itself.

On May 16, Darden Restaurants announced that it is selling Red Lobster for $2.1 billion. In the press release, Darden Restaurants stated that the chain is being sold for 9 times Red Lobster's earnings before interest, taxes, depreciation, and amortization. That valuation leaves Ignite Restaurant Group perhaps in a bind.

Ignite's overvalued  menu
If you take Ignite's word that the first quarter of 2014 was unusual and use 2013 for valuation purposes, Ignite had a $14.9 million loss from operations before interest and taxes. Add back the various components of EBITDA and other adjustments, and Ignite Restaurant Group had $21.9 million in EBITDA last year.

Based on the current market cap of around $400 million, Ignite Restaurant Group trades at 18 times EBITDA, or roughly double what Darden Restaurants is selling Red Lobster for. Darden arguably is making a distressed sale, but it's also hard to imagine that an icon like Red Lobster wouldn't be bought with a long-term horizon of a powerful brand in mind.

As for earnings, Ignite Restaurant Group trades at a P/E of 45 based on the current share price and an average analyst estimate of $0.34 per share for the year ended in December. That seems like a high P/E that is generally reserved for growth stocks. While analysts do in fact expect a jump in earnings to $0.53 per share for 2015, this appears to be largely due to cost cutting rather than any sustainable growth from sales.

The company owns more than 350 restaurants, yet it plans to only open "as many as" three new locations this year.  In offset of the three planned openings, Ignite Restaurant Group closed two restaurants.  This means the company will only have an increase of one net new restaurant this year at best.  Earnings growth is nice, but Ignite Restaurant Group still trades with a P/E of 29 based on 2015 estimates with no evidence of lasting growth in sight.

Source: redlobster.com

Compare this to Darden Restaurants, which trades at a P/E of 20 based on estimates for the fiscal year ended in May and a P/E of 18 for the year ended in May 2015. While Darden Restaurants' Red Lobster  could be described as being sold from a position of weakness, as previously mentioned, Ignite Restaurant Group isn't exactly awash in cash either. . Last quarter it ended with just $1 million in cash and $238 million in current and long-term liabilities. It last reported that current liabilities roughly double its current assets, which is actually inferior to Darden Restaurants' balance sheet position.

Foolish final thoughts
It's very hard to make a case in favor of Ignite Restaurant Group being undervalued based on numbers. The highlight of its most recent report was the Brick House Tavern same-store sales growth of 10%, but this tiny chain only represents 6% of the total number of restaurant units. . Still, this is one to keep an eye on. If Ignite Restaurant Group continues to report robust growth for this particular chain and then chooses to rapidly expand the chain, it could be a game changer. Until I see evidence of both or some other very positive development, I'll be sitting this one out as Ignite seems overpriced for the time being.

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