Restaurant stocks have been pummeled this year, so it’s to be expected that Luby’s (NYSE:LUB), a Texas-based cafeteria chain, would be down considerably . However, unlike most restaurants, Luby’s owns rather than leases most of the land/buildings for its restaurants. Furthermore, the book value doesn’t reflect this since many of sites are 20-30 years old. Trading at around $4 a share, the company is likely being valued at less than the land that it owns (not the land and buildings, just the land).
The Pappas brothers, which pretty much run Luby’s, are by far Luby’s largest stockholders, owning a bit above 30% of the company. Their interests are certainly aligned with the company long-term. However, it’s clear that management does not care about the share price. This may be due to a long-term view of the company, basically viewing the share price as something they do not need to be concerned about. Others are a bit more paranoid and think a lower price just gives them the opportunity to gobble up more of the company, perhaps even buy it out completely at a low valuation.
I do not doubt management’s desire to improve Luby’s for the long-term and commend the turn-around they have done so far. But it’s clear that shareholder interests are secondary. By shareholder interests, I simply mean the price of the stock currently…I am not going to pretend it means anything else.
I think a good example of management’s hostility to shareholders interests in this regards is when an individual investor called during the conference call and asked about the land value at current market prices…just the land, not the buildings as well. Management totally avoided the question and made it clear it would not entertain these sorts of inquiries. It’s like cmon guys, throw us a bone!
Last year, Ramius Capital, an activist hedge fund, pushed a sale-leaseback proposal for Luby’s to realize its land and real estate assets. Ramius’s researchers projected Luby’s real estate (so I assume this is land plus buildings) was worth between $7.89-$10.14 a share. Even at the lower end, this is DOUBLE where the stock is trading at. Texas real estate prices have not halved over the course of 9 months, so it’s clear that Ramius’s idea would land shareholders big bucks currently.
I understand management’s hostility to the sale-leaseback proposal at the time. The sale-leaseback would hurt margins some, so long-term isn’t a great idea. But the stock was trading at $9-$10 a share then. It’s at around $4 now. So back then, it was sacrificing long-term profitability for perhaps a mild pop in share price. Now, that mild pop could double the company’s market cap.
Furthermore, the sale-leaseback will infuse Luby’s with so much cash they can continue any of the expansion/renovation opportunities when they see fit. It’s not exactly a bad idea to begin with.
Here’s my basic point. The sale-leaseback isn’t ideal for long-term growth. I understand this. It also is a terrible time to try to sell any sort of hard asset. But management needs to learn to make concessions to deal with shareholder interests. It can’t just be management’s view and Luby’s long-term 100% of the time. Management also should take into account that shareholders are being needlessly murdered right now. Yes, my view may be short sighted, but I think the gain in shareholder value simply overwhelms any potential mitigation to the long-term Luby’s growth story.
If the Pappas want to run Luby’s like their own little fiefdom, then make shareholders an offer. Otherwise, independent shareholders still own the bulk of the company, so throw us some respect.
Disclaimer: LONG Luby’s (LUB)