Who doesn't like a tasty burger? If we're to believe my parents -- Tennessee residents and fans of Volunteer State burger joints -- that the offerings at Back Yard Burgers (NASDAQ:BYBI) are of good caliber, then the people at Yum! Brands (NYSE:YUM) are apparently not big fans of the Hamburgian Arts.
This revelation comes on the heels of Wednesday night's announcement that Yum!, owner of the KFC, Taco Bell, and Pizza Hut chains, passed on a deal to install 500 Back Yard Burger outlets in its multi-brand restaurants, which are mythically known as "KenTaco Huts." Nine were already operating. What will happen to those wasn't clear in Back Yard Burgers' press release.
What was clear was that investors didn't like the news. Back Yard Burgers was careful to note that it hasn't accounted for any new Yum! openings in this year's growth plans. Still, the potential for a meaningful chunk of high-profile expansion - the company has less than 140 stores - was clearly there. The closing of that window led to a cratering in Back Yard Burgers' shares yesterday, as the stock fell nearly 20% on 10 times its normal daily volume.
Even after yesterday's fall, however, many investors are still giving Back Yard Burgers the benefit of the doubt: The shares currently command a multiple of about 20 times 2003 EPS. This is perhaps understandable if you take into account the company's earnings growth in recent years. It's small, but it's moving in the right direction and at a pretty impressive rate.
That Back Yard Burgers' shares were hit so hard yesterday, then, had less to do with the company's potential (and solid recent past) than with investors' optimism. Shareholders are naturally concerned about management's ability to keep it up in a competitive market that runs from McDonald's (NYSE:MCD) to Wendy's (NYSE:WEN) to upstarts like Red Robin (NASDAQ:RRGB) and even Memphis star Huey's - located near my folks and the neighborhood Back Yard Burgers. With a promising growth avenue now closed, management now needs a new plan to reenergize investors.
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Fool contributor Dave Marino-Nachison doesn't own any of the companies in this article.
