Luby's: Undervalued Turnaround Play With Balance Sheet Stronger Than It Looks

Apr.23.14 | About: Luby's, Inc. (LUB)


Trading below book value, while book likely understates the market value of company's real estate portfolio.

While recent performance has been poor, Fuddruckers restaurant concept is compelling.

Company has more than enough runway to successfully execute on turnaround plan.

Management is heavily invested in the company and aligned with shareholders.

Company has suffered from macro headwinds that may ultimately reverse.

Luby's (NYSE:LUB) (share price of $5.93 as of COB on 4/22) appears to be one of those rare PE targets where the investor might be able obtain a relatively fast partial return of capital while offering substantial upside in a successful turnaround. The company came up on one of my screens for companies trading at only slightly above their tangible net worth. Usually, such companies have large debt loads, large recurring operating losses and/or much of their assets in illiquid depreciating assets like inventory. Luby's has a very different profile.

The breakout of PP&E in the company's most recent (March 28, 2014) 10-Q is the place to start:

February 12,


August 28,



Useful Lives (years)

(In thousands)







Restaurant equipment and furnishings












Leasehold and leasehold improvements



Lesser of lease term or estimated useful life

Office furniture and equipment






Construction in progress





Less accumulated depreciation and amortization





Property and equipment, net





Intangible assets, net













Click to enlarge

As another Seeking Alpha analyst recently noted: "LUB owns the structures and land on nearly 50% of its 178 locations...those properties are on the books at cost, rather than market value." However, the story does not end there. The PP&E breakout shows $65M of land and gross PP&E in Buildings of $178M. Even though land and buildings have historically appreciated over time, companies are allowed to depreciate the cost of the buildings for accounting purposes. As a result, the properties may actually be on the books as Net PP&E of less than cost. But, wait, there's more.

The company's Luby's and Fuddruckers restaurants are disproportionately concentrated in Texas, particularly Austin, Houston and San Antonio. If we use trends in regional residential real estate values as a proxy for the value of the similarly located retail real estate, the Zillow Texas Home Value Index is instructive. Texas is seeing strong home prices in 2014.

Looking at the retail real estate market directly yields more mixed results. The LoopNet Texas retail property sale price trend ($/sqft) is decidedly positive while the asking prices have actually come down over the last few years.

While appraising the real estate equity directly would require a lot more diligence, it is possible that a series of real estate sale-leaseback transactions could extinguish the company's ~$37 million of existing debt while releasing enough capital to fund a turnaround and dividend out some excess cash. Even if you assume that the overall real estate portfolio has only experienced moderate price appreciation, the value trapped in the company's balance sheet is very material relative to the company's overall market cap (~$165 million). In fact, with $37 million of debt and a cost basis on the land and buildings of $243 million, it is possible that the market is valuing the whole (business and real estate) for substantially less than the real estate portfolio, alone, is worth. This fact, coupled with the ability to extract value from real estate equity with sale-leaseback transactions (or even commercial mortgages, for that matter), may make the company enticing to private equity firms or activist investors.

To be fair, operating performance in the last 2-3 quarters has been poor. The company had negative operating cash flow in the last two quarters and spent more on capex than it produced in operating cash flow three quarters ago. However, that can be understood in the context of the company's attempts to turn around underperforming restaurants.

Management has considerable skin in the game, as the Pappas brothers, together, own more than 7M shares, according to Yahoo Finance (~30% of the outstanding shares). While other SA contributors have grumbled about the share performance since they initially bought into Luby's, it is reassuring to see that they maintain a significant stake in the company they are responsible for managing.

While I am not personally familiar with their namesake Luby's restaurants, I am very familiar with Fuddruckers. It is a mid-range to upscale burger concept that offers burgers, steak and "exotic" burgers (wild boar, buffalo, kobe beef, etc.). While I was not impressed with the Kobe beef burger the last time I had one there, the buffalo burger was tasty and the traditional burgers and steaks are reliably good and served fast-casual in a lively casual setting. But, don't take my word for it. A brief look at Yelp and Google Places reviews of the company's Texas Fuddruckers locations range from mediocre to very good (with Places having markedly higher ratings) - many of the locations have 15 or more reviews on Google Places. Overall, it's a compelling restaurant concept that seems to be faring reasonably well even as many "middle of the road" casual dining concepts have been struggling.

The Texas Luby's restaurants have somewhat lower, but still respectable, reviews on both Google Places and arguably were better received by the Yelp community.

If the economic recovery ultimately becomes more inclusive, these "middle of the road" casual dining restaurants are likely to disproportionately benefit. Such tailwinds could provide meaningful upside to LUB, which is currently trading at a depressed valuation.

Disclosure: I am long LUB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.