Nathan's Famous: No Bark, No Bite, Just Profits

Mar.26.07 | About: Nathan's Famous, (NATH)

Originally begun in 1916 as a hot dog stand in Coney Island, Nathan’s Famous (NASDAQ:NATH) products are now available throughout the United States and overseas. The business model is simple. Revenues are generated by:

1. Operating company-owned restaurants (6 units).

2. Franchising the Nathan’s, Miami Subs, Arthur Treacher’s, and Kenny Rogers restaurant concepts. (361 franchised or licensed units in 23 states and 11 foreign countries).

3. Licensing the sale of Nathan’s products within supermarkets and other retail venues.

4. Nathan’s Branded Product Program: This program enables food service operators to offer Nathan’s hot dogs and other branded products for sale within their facilities. These food service operators are granted a limited use of the Nathan’s trademark with respect to the sale of hot dogs and other proprietary food items and paper goods.

The company’s previous fiscal year ended March 26, 2006 and the annual report can be accessed through the company’s website.

Revenues over the last 3 years are as follows:

2004: 30M
2005: 34.3M
2006: 41.4M

This translates into annual revenue growth of 17.5%.

Net income over the last 3 years is as follows:

2004: 1.9M
2005: 2.7M
2006: 5.7M

This translates into annual earnings growth rate of 73%.

Diluted EPS over the last 3 years is as follows:

2004: .33
2005: .45
2006: .87

This translates into annual diluted EPS growth of 62%.

Owner earnings, defined as (net income) + (depreciation) + (amortization) + or - (one-time charges) - (capex), over the last 3 years is as follows:

2004: 2.8M
2005: 3.6M
2006: 6.3M

This translates into annual owner earnings growth of 50%.

The diluted share count over the last 5 years is a follows:

2002: 7.1M
2003: 6M
2004: 5.7M
2005: 6.1M
2006: 6.5M

Since 2001, the company has repurchased 1.9M shares at a cost of 7.2M.

There are currently 5.9M shares outstanding and the float is 4.94M shares. Howard Lorber, Chairman and CEO, owns 416.6K shares. The average daily trading volume is 9,868 shares. No analysts cover the company, and the company does not hold conference calls. There are hardly any press releases apart from the quarterly earnings reports. Watching this company is a bit like watching paint dry.

One thing to watch out for is future dilution. There are 5.9 million shares outstanding but there are also options outstanding for 1.3 million shares. Those options are at an average price of $5.08 and have a life of 4.4 years. So, in four years, the number of shares outstanding will rise dramatically.

The company reported results for the 3rd quarter of its 2007 fiscal year on February 5. For the 39 weeks ending December 24, 2006, revenue is 35.9M. This translates to a FY 2007 run rate of 47.9M. Owner earnings for the 39 weeks come to 5M which translates to a run rate of 6.6M. The balance sheet shows 19.9 M in cash and no long-term debt.

Here are some considerations which might aid in determining a suitable buy-in point.

Share price: 14.62
Market cap: 86.3M
Cash: 19.9M
Debt: $0
Enterprise value: 66.4M
Revenue run rate: 47.9M
EV/revenue: 1.4
Owner earnings run rate: 6.6M
EV/OE: 10

Let’s reverse engineer a DCF calculation to see what growth rate is built into the current price. Here are the assumptions used in the DCF calculation:

1. Owner earnings run rate: 6.6M
2. Growth rate in years 1-5: 0%
3. Growth rate after year 5: 0%
4. Discount rate: 11%

Under these assumptions, we obtain a DCF value of 13.54. Of course, one should tinker with the discount rate and run a number of scenarios, but it certainly does appear that the stock is priced under the assumption of practically no growth.

By the two measures used here, EV/OE ratio and DCF valuation, the stock appears to be priced very attractively.

I love dogs. They are uncomplicated creatures, easy to understand, and are consistent to a fault. Nathan’s has all these qualities. It's a small operation and it is easy to understand how it makes its money. And the presentation of its financial results is simplicity itself. Nothing intricate to decipher, no GAAP vs. non-GAAP nonsense. Just the results presented with disarming clarity and simplicity. And they sure are consistent. The most recent quarter was the 15th consecutive quarter in which quarterly profits from continuing operations have increased as compared to the same period of the prior year. No analysts follow the company. A mere handful of shares trade every day. And they just keep chugging along -- no bark, no bite, just profits.

Disclosure: Author has a long position in NATH

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