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The Sleuth
And that's only coffee...what about lunch and dinner? Going out to a sit-down restaurant with the wife and kids costs at least $50 plus tip. But ordering pizza or hitting the drive-thru on the way home can save you a bundle. So will we see more people opting for McDonald's instead of trying the newest $12 super burger at Ruby Tuesday? As inflation (helped along by high energy prices) continues to pinch consumers' disposable income, we'll see more overextended families forgo trips to Outback Steakhouse, Chili's and Applebee's. And America's very own fast-food joints will catch these customers as they search for cheaper alternatives. ************************************ A Hush-Hush Settlement... This anticipated settlement -- whether awarded in front of a jury or in an out-of-court action -- could well go down in history as the largest ever handed down in a patent infringement case. There could be several billion dollars changing hands before it's all said and done. Time is running out... Read the special report and see for yourself... ************************************ One small-cap fast-food chain has caught my eye recently: CKE Restaurants Inc. (CKR: NYSE). And depending on where you live, you might know this company by a different name. You see, CKE operates Carl's Jr. restaurants out West and Hardee's restaurants predominantly in the Southeast. And while some fast-food chains have attempted to "go lean," Carl's Jr. and Hardee's take pride in their meaty menus. Instead of going the way of salads, fruit and water, Hardee's and Carl's Jr. have fought their way into the hearts of fast-food gluttons. They offer big burgers and make no apologies for it. As unhealthy as this may be, they might be on to something. Who goes to a fast-food restaurant with a craving for a salad and bottled water? The strategy seems to be working. According to the Associated Press, "same-store sales grew 3.8 percent in August and 3.9 percent in the second quarter, as customers continued to eat at its restaurants despite the high gasoline prices that are eating into consumer discretionary spending." Looking further out, the numbers still are strong. First-quarter 2006 results showed nice organic growth. Same-store sales increased 5.6 percent at both Carl's Jr. and Hardee's company-operated restaurants, compared to the prior quarter year. And in July, CKE announced it had expanded its program to repurchase its stock. The board increased CKE's repurchase authority by $30,000,000, for a new limit of $50,000,000, according to a company release. ************************************ The Worst Real Estate Bust In American History Has Begun Home prices down 15-17% from a couple of years ago, foreclosures up 63% and the "flu" is spreading to Naples, Miami, Orange County, Boston...everywhere. Learn 5 ways to protect yourself from the new housing recession... ************************************ At first glance, CKE looks like a steal with a P/E of only 5.5. But look back a few quarters and you'll see an unusual earnings report -- $2.10 per share for the fourth quarter of 2005. This makes a big difference when calculating the trailing twelve months' P/E. Let's figure in CKE's TTM P/E ratio for January 2007 (assuming the share price were to stay the same). This way, we don't have to worry about an unusual quarter getting in the way of a more accurate valuation. First, assume CKE Restaurants will post in line with analyst expectations of 20 cents and 17 cents for the next two quarters, respectively, then assume another quarter with earnings between 17 cents to 20 cents. If the stock were to end the year at $15 a share, then one could expect a P/E of around 18 or 19 -- still not bad for an industry whose average P/E is 21.3. But just because CKE looks to be doing well now, it does not mean it will be immune to rising operating costs. CKE might slip a little as 2006 comes to and end thanks to gas prices that affect transportation costs. But the fast-food chain will probably fare better than its more expensive counterparts. Just check out this comparison:
As you can see, shares of CKE have lost about 10% of their value in the past six months (even as the chain has been posting positive results), while casual-dining franchises such as Applebee's (APPB: NASDAQ), OSI Restaurant Partners (OSI: NYSE) -- the folks that bring you Outback Steakhouse -- and The Cheesecake Factory (CAKE: NASDAQ) have all suffered fates much worse. And if CKE still manages to attract more customers to its restaurants, the stock could be a good buy. Right now, the stock trades at only 0.58 times sales. The average restaurant trades at more than one and a half times sales. However, there are a couple of big negatives. First up is debt. CKE is carrying a truckload of long-term debt -- $245 million to be exact. This amount dwarfs the $22 million in cash CKE is carrying. Second, CKE just announced that it will it will convert $38.5 million of notes to common stock. This will further dilute the value of its shares. Nevertheless, CKE is worth keeping an eye on. It's a company that's managed to turn itself around into a profitable enterprise, and it could benefit greatly if droves of hungry middle-class families start cutting back on extra spending. Let's keep an eye on it for now. Best, Gunner
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Greg Guenthner is a contributing editor for Small-Cap Strategy Report and has helped in developing the Million Dollar Portfolio... <click here for full bio> |
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