As we head into the week's long-awaited end, it's time to once again grab up your steak knives, whiskey glasses, and slide rules, cowpokes. Monday's soon to come, and with it, the Q4 and full-year 2005 earnings release for Lone Star Steakhouse & Saloon (NASDAQ:STAR). Let's take a quick look-see at the menu, shall we?

Wall Street Wisdom:

  • General consensus. A grand total of two (count 'em, two) analysts follow Lone Star. That's 10 times fewer than rival Outback (NYSE:OSI) can claim -- but at least Lone Star's analysts are unanimous in their buy ratings.
  • Revenues. With the estimate sitting at $205 million, Lone Star is expected to post almost perfectly flat sales against last year's Q4.
  • Earnings. The bottom line isn't so lucky. Analysts expect to see net profits plunge 81% to a mere $0.09 per share on Monday.

Margin watch:
I've got good news and bad news. Good: Over the past 18 months, Lone Star has improved its rolling margins considerably. Bad: Most of that improvement happened more than a year ago, and the rolling gross, operating, and net margins have been on a long-term slide over the past year. The operating and net margins haven't yet the nadir they reached 18 months ago, but that does appear to be where they're heading.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

16.6

16.3

16.9

16.9

17.1

16.6

Op.

6.4

6.2

7.1

7.1

7.2

6.8

Net

2.9

2.9

4.7

4.6

4.6

4.1
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
According to an update released in January, Lone Star's company-owned restaurants experienced declining comparable sales in 2005 versus 2004's numbers. The main problem continues to be the firm's self-branded Lone Star chain, which comprises 86% of its total store count. Every other chain in the company experienced rising comps: Sullivan's, Del Frisco's, and Texas Land & Cattle were all up year over year.

Cash profits are also waning. Year to date, Lone Star has generated $6.2 million in free cash flow, down considerably from the year-ago period's $14.4 million.

Valuation metrics:
Unless Lone Star can get its comps moving upwards once more and reverse the slide in free cash flow, this company simply isn't worth owning. Its run rate this year suggests a valuation of 66 times free cash flow for the shares -- making them three times as expensive as the trailing P/E of 22 would suggest. At that price, Foolish investors are better off eating at home.

Fool contributor Rich Smith does not own shares of either company named above.