Why Flanigan's Enterprises' Shares Are Significantly Undervalued Compared To Peers

May.21.13 | About: Flanigan's Enterprises, (BDL)

Three of the last stocks I have written articles about have seen significant price appreciation because they were undervalued, in my opinion:

I am constantly searching for undervalued companies. I believe I have found the next stock that should be more than double the current price when you compare its numbers to the valuation of its industry.

Flanigan's Enterprises Inc. (NYSEMKT:BDL), operates a chain of full-service restaurants and package liquor stores in south Florida. The company operates restaurants under its Flanigan’'s Seafood Bar and Grill service mark that provide alcoholic beverages and full food service; and package liquor stores under its Big Daddy'’s Liquors service mark, which offer private label liquors, beer, and wines.

For its Fiscal Year 2012, BDL reported $0.76 EPS that included $0.10 in charges due to the one time start up costs of a new store. So the business had an EPS run rate of $0.86 in Fiscal 2012.

For the trailing twelve months, BDL reported $0.90 EPS that included $0.28 in charges due to the one time start up costs of a new store. So the business had an EPS run rate of $1.18 for the trailing twelve months.

For the first two quarters Fiscal Year 2013, BDL reported $0.59 EPS that included $0.18 in charges due to the one time start up costs of a new store. So the business had an EPS run rate of $0.86 for the first two fiscal quarters of this year. This last quarter the company reported $0.40 EPS.

The company stated in the last 10-Q, "During the next twelve months, we expect that our restaurant food and bar sales will increase".

The restaurant sector has an average P/E ratio of 22.10. If I take the trailing twelve months of adjusted EPS of $1.18 X 22.10, that equals a share price of $26.08 versus the $11.11 where it closed today (Monday). If I conservatively assume BDL can grow adjusted EPS to $1.40 this year, (since BDL is already at about the same adjusted EPS level of all of Fiscal 2012 after the first two quarters in Fiscal 2013) then at the industry average P/E ratio, that equals a share price of $30.94.

Potential risks include general economic weakness potential and higher food costs. BDL has had what seems to me to be conservative boilerplate warnings about higher food costs adversely effecting gross profit and income for the last 6 quarters that I looked at. However, gross profit percentage was 65.54% in Fiscal 2012 versus 65.64% in Fiscal 2011. Additionally, gross profit percentage was 64.54% in the first six months of Fiscal 2013 versus 65.03% in the first six months of Fiscal 2012. So for all the quarterly warnings, gross profit percentage does not seem to move that much and should be mitigated by the expected higher sales in my opinion. Lastly, BDL has a float of approximately 600k shares. A stock with this small a float should not be chased and in my opinion is not for large positions.

It is my opinion that BDL is significantly undervalued when compared to its peer group. Applying the industry P/E ration just to the trailing twelve months adjusted EPS gets you a share price of $26.08 versus the $11.11 where it closed today. I think using trailing twelve months EPS is very conservative given the growth and expected higher sales. Combined with the fact that BDL has a tiny float of approximately 600k and outstanding shares of only 1.86 million, this stock could rapidly appreciate to a point where it is more fairly valued compared to its peers.

Disclosure: I am long BDL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.