Something interesting is developing at quick-casual Mexican restaurant chain Rubio's
You'll have to forgive your writer for being a little late on this one since Rubio's operational turnaround has been going on for six quarters now and the story is a good one. In the most recent quarter Rubio's turned in a sales increase of more than 10%, coupled with an operating margin improvement of more than 200 basis points. Operating margins, which are now more than 6%, are the best the company has reported as a public entity. Numbers such as these will often get attention in a hurry, regardless of how other companies or the general economy is doing.
A large part of the impact can be attributed to a revamped menu, a focus on existing restaurants, and driving down operational costs. Helping to drive these changes is new CEO -- formerly COO -- Sheri Miksa. Miksa brings a wealth of operational and marketing experience to the business, including time at Yum! Brands'
Rounding things out there are a number of items that we look for in Hidden Gems. The aforementioned margins and sales are expanding at increasing rates. Ralph Rubio, the founder and chairman, is a large shareholder and is actively involved in the business. The valuation appears rich with a P/E of 31, but backing out expansion capital expenditures and adding back cash I arrive at a free cash flow-to-enterprise value of 19, which is slightly more reasonable. I prefer lower multiples, but if slight improvements in margins continue and assuming about a dozen new stores open next year, today's prices should prove fair.
The company does face competition from competitors such as Wendy's
All of this requires another look at the question raised at the outset: Can Rubio's double from here? There are many reasons to think so, including a focused management team, but interested small-cap investors may do best by allowing the volatility inherent in small caps to create a slightly lower price than today's $12 per share.
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Fool contributor Nathan Parmelee does not own shares in any of the companies mentioned.