O'Charley's Inc. (NASDAQ:CHUX) stock, down 40% off of its high in 2002, looks as though it has been on the receiving end of legendary Irish boxer Dan Donnelly's right hook. Is it time to sing "Go Where Glory Waits Thee," a proper Irish melody bidding farewell, or is this a time to dig this Irish jig?

While O'Charley's stock has been under pressure, it's important to note that it is not alone and to highlight why others are facing similar fates. Indeed, Darden Restaurants (NYSE:DRI), Lone Star Steakhouse (NASDAQ:STAR), and Brinker International (NYSE:EAT), among others, have all seen similar stock performances over the past several months. These price drops are due in large extent to the soaring cost of commodities such as poultry, dairy, and pork. Fool writer Alyce Lomax highlighted the similar problem that is currently befalling Outback Steakhouse (NYSE:OSI).

From this it may be easy to assume that O'Charley's woes are simply due to high commodity costs, but stiff competition is another threat to this franchise. O'Charley's will need to keep figuring out ways to differentiate its products from the likes of Ruby Tuesday (NYSE:RI), Applebee's (NASDAQ:APPB), and another Irish threat, Bennigan's Grill & Tavern.

Now that we know some of the challenges facing O'Charley's, let's take a closer look at its latest second-quarter report. Behind the scenes, we find that its cash position has decreased from $9.5 million at the end of the fiscal year in 2003 to $5.7 million by second quarter's end in 2004. Its debt has also decreased but still remains high at $148 million.

To go along with a fairly unattractive balance sheet, with the expectation to earn $1.03 in earnings per share in 2004, it is currently stamped with a current-year price-to-earnings of 15. Looking ahead, O'Charley's is priced at a forward-year P/E of 12. Considering that through two quarters in 2004 its earnings have decreased 14% compared with the same results a year ago, the current valuation looks a bit steep. Looking closer, though, analysts are expecting the company to earn $1.26 per share in 2005, representing an estimated 22% growth. Are these estimates reasonable? It's a good question and one that will largely depend upon a softening in commodity prices.

Additionally, at first glance its current level of structural free cash flow (SFCF) at $3.3 million, with a run rate of $6.6 million, does not look impressive for a company bearing an enterprise value (EV) of $519.3 million. But digging a little deeper we find that the majority of O'Charley's capital expenditures consists of the 14 new restaurants that have opened this year at an estimated average cost of $2 million each. Back out the estimated $28 million in new site openings, and its current level of SFCF changes to $31 million with a run rate of $62 million.

What this tells us is that its EV/SFCF ratio is a reasonable 8.4 given the expected earnings growth and taking into account that this franchise currently has 217 restaurants compared with the 1,500-plus Applebee's restaurants. If O'Charley's continues to develop and differentiate its product, with ample growth potential along with a reasonable valuation, its stock is worthy of an addition to an investor's watch list.

Fool contributor Jeremy MacNealy has some Irish in him, but he does not own shares of O'Charley's or any of the other companies mentioned.