Update: Nathan's Famous Earnings

Aug. 9.14 | About: Nathan's Famous, (NATH)

Summary

The company posted impressive growth in both the top and bottom lines.

We still think the long-term prospects for the hot dog industry are poor.

We expected the company to post declining sales and earnings but our thesis is taking longer than expected and the market continues to overvalue the company.

Nathan's Famous (NASDAQ:NATH) managed to post earnings for fiscal 1Q 2015 of $0.89, up 22% y/y. Shares soared as much as 6.5% on announcement. Revenues for the quarter were up 18.2% y/y. Its biggest revenue generator, Branded Product Program (which includes sales to the foodservice industry), saw sales up 14.6% y/y.

We first profiled the company back in October. Shares are up just 5% since then, but they are still trading well above our fair value estimate of $28. Back in October, shares were trading at decade high P/E and P/S ratios, roughly 27.5x and 3.3x, respectively. They now trade at 29x earnings and 2.8x sales. At the time, we noted that,

...one of the big industry headwinds is that growth in overall hot dog sales will likely be limited going forward. There's a changing demographic makeup in the U.S., namely declining birth rates. The fact of the matter is the hot dogs are mainly a kid's favorite. That worked well for the 95+ years that Nathan's has been in business when most immigrants came from Europe and hot dogs were a favorite that parents served their children. Now most of the immigrants into the U.S are likely to come from Central and South America and hot dogs aren't a staple in their children's diets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.