Luby's Inc. Cooking Up Profits

Includes: CKR, LUB
by: Mark Krieger

I thought it might be an appropriate time to update Luby’s (NYSE:LUB), especially since it has been a while since my last piece, when I unfortunately proclaimed shares in the $5 area to be a good purchase. That buy recommendation obviously didn’t turn out well! The shares have fallen another 25% since then, due to a couple of disappointing earnings reports. However, there seems to be a few rays of light protruding through the end of the tunnel in regard to the company’s latest results.

Income Statement Highlights

  1. On a sequential basis, LUB’s second quarter profits mushroomed 50%, from 10.2% to 15.8%.
  2. The Company was able to slash its G&A costs 11%, from $5.6 million to $5.0 million (an impressive feat, as G&A tends to be a fixed cost expenditure).
  3. LUB decreased its food costs by 20 basis points, from 27.6% to 27.4%.
Balance Sheet Highlights
  1. Book Value: $5.60
  2. Assets Held For Dispositions: The Company's carrying value of assets on its books is approximately $29 million, due to the recent closing of 25 of its underperforming locations.
  3. LUG holds $5.1 million of municipal bonds.
  4. LUG owns the land and structures on 68 of its 96 locations.
  5. LUG has zero debt.
  6. The hidden value of LUG's real estate holdings makes it attractive as an LBO candidate for private equity firms, such as restaurant buyers Apollo Management and Thomas Lee Partners, each of which is involved in an active bidding war for CKE Restaurants (CKR). Remember, the company’s properties are recorded on its balance sheet at cost – and many have appreciated significantly over the years.

Even though management made it clear that the Company won’t be profitable in fiscal 2010, the stock has been sneaking up (already having increased 11% from its lows). I guess the market believes that expectations have dropped so low, that any results will end up looking better than expected.

Although second quarter sales dropped a whopping 12%, a glimmer of hope is glowing in the background, since LUB’s culinary services division is doing quite well. LUB's culinary division has shown recent success with picking up new customers, gaining 33% more accounts from 12 to 16. It also just signed a lucrative contract with Lone Star College Systems Food. Recent agressive promotions on the store level could pay dividends to the top line, as current marketing plans are actively offering specials to attract budget conscience diners.

Insiders resume buying: It’s been almost 14 months since the Pappas brothers have purchased LUB shares, but in March they stepped up to the plate by purchasing 38,223 shares, reaching an ownership stake of 28.5% between them. The fact that these guys are actually putting their money where their mouth is, creates a definite confidence boost-something the stock desperately needed.

Legendary value investor Walter Schloss likes LUB: Mr. Schloss prefers to invest in companies which have common characteristics, such as : (1) trading below book, (2) have no debt, (3) possess significant insider ownership, (4) trading at historic lows. LUB fits all this criteria to a tee, and if you are a Schloss disciple, this one should stand out on your buy list. Other value players interested in LUB’s potential include Hodges Capital Management, Value Expectations (proponent of American Finance Group’s default valuation screen) and Scotts Investments.
Bottom line: This stock certainly qualifies as an orphan at this juncture. It is unloved and forgotten, and does not even have a single analyst following it. Although, that could be a good thing. The fact is, these types of situations often offer the best values, as it enables the savvy investor to buy dollar bills with fifty cent pieces. How else are you supposed to buy low, unless the equity you are purchasing is out of favor?
Disclosure: Author long LUB