Small-cap stocks with good potential and Mexican food are two of my favorite things. It appears you might get both with the too-obviously-named company Mexican Restaurants (NASDAQ:CASA).
This small operator of, well, Mexican restaurants with names like Casa Ole, Tortuga Coastal Cantina, La Senorita, and Crazy Jose has been put on Motley Fool Hidden Gems' Tiny Gems list, and it's a big holding for a kindred spirit, small-cap investor David Nierenberg, who's tacked on 24% a year since 1999.
Today's operating results, which pumped the stock up 14%, go a long way toward explaining why. For the fourth quarter, the firm reported earnings of $0.30 per share, which looks a ton better than the penny per stub of the year-ago quarter. For the full year, earnings per share climbed to $0.63, up from $0.48 year over year. With a jump like that, are we looking at a budding Brinker International (NYSE:EAT), Darden Restaurants (NYSE:DRI), Outback Steakhouse (NYE: OSI), or Applebee's (NASDAQ:APPB)?
Not so fast, amigos. There are slews of extra items in these years, including extra time (for the prior year), Hurricane Rita-related charges, and losses from discontinued operations due to restaurant closures. Straining out the latter items -- which Casa's release does -- you see that for the most recent year, adjusted earnings per share come to $0.61 per share, against $0.65 for the prior year.
On the revenue line, the fiscal 2005 same-restaurant sales increase of 3.8% might seem pretty slim, but considering the hurricane impact in Louisiana, anything in the plus column looks strong.
Without a balance sheet or cash flow statement (c'mon, folks, throw us a little more detail next time around!), it's tough to figure out exactly where the firm is currently trading on a price-to-cash flow basis -- and that's the sticking point here.
By my numbers, Mexican Restaurants' free cash flow profit margin has ranged from 1.1% to 4.2%. As of October, the trailing-12-month figure stood at 2.3%. Atop the roughly $80 million in full-year 2006 sales, that would yield a thumbnail free cash flow of $1.84 million. With a required rate of return of 11%, I'd need to assume 18% or better growth from this firm to make today's share price look about right. That's a lot more than I'm willing to grant even the faster-growing concepts out there.
Mexican Restaurants may prove to be a bargain, but today's fiesta looks overdone to me. Value-minded investors would do better to take a siesta and wait for the full financials before paying up for this intriguing little business.
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Seth Jayson will have the free cash flow platter with a side order of balance sheet, please. At the time of publication, he had positions in no company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
