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Luby's (NYSE:LUB) had to finance $51 million to acquire Fuddruckers, and in less than a year has already paid back 40% of that amount. Now, as a result, it is seeking a new and more favorable credit facility from its lender. Fuddruckers consists of 127 franchise stores and 59 company owned stores and in the third quarter, company owned stores added $22.2 million to LUB's top line, while its franchise income piled on another $1.60 million, equivalent to $4199 per month of franchise fees, per store.

Third quarter earnings: Although the company's earnings surged 100% from 3 cents to 6 cents on a 44.7% sales increase (the company beat expectations but its share price failed to respond), food costs were troubling, escalating 80 basis points, from 27.4% to 28.2% on surging commodity prices. In addition, LUB's "other operating expense" category swelled 260 basis points from 19.5% to 22.1%- attributable to its leased Fuddruckers locations.

On the plus side, the company was able to rein in both its G&A ( 8.4%) and payroll costs (33.6%) by 60 and 150 basis points, respectively. Same store sales increased 3.5% (locations remained flat at 96) while LUB's Culinary Service division revenues jumped 9.1% to$3.6 million, aided by contract growth from 17 to 18 locations.

Major ownership: The Pappas brothers are LUB's largest shareholder, with a 17% stake and in the last year have purchased an additional 245, 000 shares. Insiders buying their own stock is always a confidence builder. Last April, Harris Pappas retired as COO, however, Chris Pappas still remains as CEO. The next three largest shareholders are: Bandera Partners (8.5%), Dimensional Fund Advisors (7.16%) and Hodges Capital Management (6.12%)

Real Estate is golden: The company owns the land and buildings on 68 of their Luby's locations, as well as 18 other properties with a carrying value of $13.7 million, for sale under, "discounted operations." LUB also owns the real estate at 15 of its Fuddruckers locations. These real estate holdings represent a source of hidden value (most of it is on its books at cost, rather than market value), that could be monetized by them or an eventual suitor!

The future: LUB has completed its first ever Fuddruckers franchise meeting to gain input from these critical operators. The company is also excited about its 3500 square foot downtown Houston Fuddruckers prototype location, set to open next month, and is enthusiastic about the response to its Luby's weekend "all you can eat" breakfast promotion. If the economy continues to improve and fuel and food costs begin to stabilize, the stage could be set for the cafeteria chain to show some drastic earnings gains. If not, the shares could continue to languish.

Bottom line: The stock is cheap, selling at a small discount to book value while producing some nice cash flow (nearly $12 million in its last three quarters). The restaurant chain has made nice progress getting Fuddruckers closer to firing on all cylinders and successfully integrated with its other operations to obtain greater economies of scale.

Its lone analyst, Capstone Investments, has forecasted tepid fourth quarter earnings of 2 cents on sales $104 million, which could easily be beat. Capstone has set a very conservative, one year price target of $6.80. In the meantime, for those with a "short term mentality," the shares have definitely been range bound - consequently, buying in the low $5's and selling in the high $5's makes sense, as a recurring trade.

Source: Luby's: A Sleeper That Should Be Considered