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Luby's (NYSE:LUB) primarily operates as a traditional cafeteria restaurant. They operate 128 restaurants throughout Texas, Oklahoma, Arizona, Louisiana, and Arkansas. Two of those 128 restaurants primarily serve seafood. Luby's offers items like steak, turkey breast, pork, and salads, among other things. The food is prepared in small quantities and is constantly checked for quality, and they offer some food that is on the healthier side. The first Luby's was opened in 1947 after the company was founded by Bob Luby.

I like Luby's because they've been around for a long time and their serving style obviously has a market if they've been able to expand to where they are today. At first I thought that maybe this style was a little too odd or out-of-date, but since they've been able to keep expanding over the course of 60 years, I think this is one worth watching. They do have a legitimate market.

The P/E of 15.16 may seem low, but it's actually about where I feel the company should be valued. Why is that? Over the past few years, the company has been shutting down restaurants and expansion has not been happening. In fact, as of November 20, 2002, Luby's operated 192 restaurants. Sales were hit hard, but the company continued to produce positive cash flow and was non-reliant on the bank through the difficult time. A P/E around 15 is justified when there is no expansion happening. Management will probably take things very slow after shutting down so many under-performing restaurants.

Luby's has $18.65 million in cash and no debt. They're producing good cash flow as well. Then where is the cash going to? Capital Expenditures. Management is putting money into renovating restaurants and improving equipment, but they are putting a small enough amount into CapEx; that cash on the balance sheet is building up. I'm not surprised that management is doing this: at the end of fiscal 2001, the company had $24.08 million in cash with a large $127.4 million in debt. The company has been in a turnaround phase, and now that they have no debt, and its therefore not surprising that management is building up a strong cash position before much expansion. The company was in miserable shape 5-6 years ago, but they've managed to turn things around. It's definitely impressive.

Insiders own 6.98 million shares, or 26.43% of the company. A large chunk of those shares are held by Chris Pappas [CEO] and Harris Pappas [COO] (2,284,803 each). Both Pappas' have been with the company since 2001, which is interesting, because that's right when the company started to turn around and get things going in the right direction. I like the way they have gotten the company to being in good shape again, because they knew what needed to be done and they came in and did it. Now they are building up a cash position, the company has no debt, and the business is strongly producing. A very impressive turnaround if you ask me.

The big barrier here is if the company will start opening new restaurants anytime soon. I have a feeling management will continue to be very cautious, so we probably won't see much expansion until they have accumulated at least $30 million in cash. This is just my guess, but based on how things of been, there won't be any fast growth seen here anytime soon.

The opportunity may come if the market gets impatient with Luby's. They still have a fine foundation, the balance sheet is healthy, and the business is nicely producing cash. Any major sell-off would be an interesting opportunity, one worth looking into. I think we will see some new restaurants opened soon, but not at a fast rate and nothing to write home about. Nonetheless, I like their management team, so if anyone can expand the company in a profitable, reasonable manner, it's the current team. They wouldn't have been able to do what they've done over the past few years without really knowing the restaurant business and Luby's.

As of the latest quarter, Luby's had 8,210 employees.

Luby's is worth watching; the company has a good cash position and a business producing good cash, so if we do see a significant dip I'd definitely be interested. Only three analysts follow the stock, so we probably won't see real extreme volatility, but it's possible. Here's the analyst estimates history:

LUB

Analysts are estimating an EPS of $0.10 for the coming quarter (2Q 2007).

I don't think there should be any rush to invest in Luby's. It's an interesting restaurant with a good foundation, though, so I'd recommend waiting for now, and get interested if there is any significant price drop. They aren't going anywhere in the short-term, but the market may get impatient if new restaurants aren't open. Patience is vital with a situation like this one, so it's one to keep an eye on.

Source: Eye on Luby's