I am a sucker for small companies with big-company potential. But when it comes down to actually shelling out the money, my investment style starts looking more like a value style. There is just something about investing below intrinsic value.
Not making value headlines today is Worldwide Restaurant Concepts (NYSE:SZ), which operates, franchises, or is part of a joint venture in 306 Sizzler restaurants worldwide, 112 KFC restaurants (located primarily in Australia), and 22 Pat & Oscar's restaurants in California. The company issued a press release today, saying, "Management and the board believe that our stock price does not reflect the true value of our company and our prospects."
That's a statement we'd all expect from a company putting itself -- or, if requested, just some of itself -- up for sale, but let's still see whether it makes sense.
A bad place to start would be last year's earnings; they were hammered by an E. coli incident at Pat & Oscar's. (Am I wrong, or do E. coli and restaurant not go hand in glove?)
During the last quarter, net income rose almost threefold, while overall company same-store sales increased 3.7%. Not spectacular growth, but growth nonetheless. But if you work with the $0.17 per share analysts expect in earnings for this fiscal year, the stock trades for 23 times earnings. For comparison, you can buy KFC owner Yum! Brands (NYSE:YUM) -- and a great growth story in China -- for 20 times this year's estimated earnings.
Similar quickie comparisons with other steakhouse concepts are no more flattering. Ryan's Restaurant Group (NASDAQ:RYAN) trades for 13 times this year's estimates (although its sales are falling), and more upscale (and strongly growing) Outback Steakhouse (NYSE:OSI) sells for 20 times this year's expected earnings.
If you are scratching your head and asking, "Where's the value?," it is in the future. Analysts expect the company to follow this year's (halfway finished) performance by almost doubling earnings to $0.33 a share next year. That places the stock at a low 12 times projected earnings but could require the company to raise its 3.3% trailing-12-month operating margins to above 4% (the industry average is 4.8%). That seems like a big stretch.
With a very manageable net debt of $7 million, Worldwide Restaurant Concepts is not in financial trouble. Although the press release suggests the company would be open to a complete or partial sale, it also leaves open perhaps the most likely scenario -- no action at all.
Worldwide Restaurant Concepts says it is undervalued. Saying so has sent the stock up almost 12%. But, after a quick look at the company, one might wonder whether that missing value is now reflected in today's stock price.
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Fool contributor W.D. Crotty owns stock in Yum! Brands.
