Ark Restaurants (NASDAQ:ARKR) is a trendy restaurant chain operating throughout the United States but most notably in Las Vegas and New York where there are multiple locations offering various themes and concepts. The company has a lot going for it as we wade further into the choppy waters of the 2016 market, such as a high yield, explosive growth potential, low gas prices, and really good food.
The company has been posting strong growth, with the most recent earnings report showing quarterly YoY revenue growth of 9.5%, and with multiple tailwinds at the company's back, this growth should accelerate in 2016. The company trades at only 13 times forward earnings and 1.88 times book value, which are both indications that the stock is either undervalued or at least trading at fair value considering the rate at which it's growing. At only 1.88 times book value, the company is trading at a small premium to its net tangible assets, which means that investors are getting all of the value from the brand, goodwill, and business activities at a big discount. In the words of Benjamin Graham, this provides a margin of safety for the conservative investor that helps him to sleep well at night not having to fear a cataclysmic loss due to one disappointing quarter or bear market.
But ARKR isn't just an inexpensive stock, it's also a superior business operating in the consumer discretionary space that continues to benefit from low gas prices. With Saudi Arabia, the largest oil producer in the OPEC, recently announcing that they will continue to produce oil at high levels despite the global oversupply, prices continue to decline. The more oil prices decline, the more consumer discretionary spending increases. In fact, research shows that consumers in America spend up to 80% of their gas savings and the largest portion of this money is spent at restaurants . It is estimated that the average American spent over $2,000 a year on gas before the decline in prices over the past year. If the statistic above is true that we spend 80% of our gas savings and most of that goes to restaurants, then the average person is spending over $1,000 a year at restaurants, a substantial figure.
With a total market cap of only $81 million, ARKR has virtually unlimited room to continue its expansion, which looks probable considering recent results. But not only is ARKR performing well on its own and expanding aggressively, but it is doing so in an industry that is also continuing to expand with no end in sight. The company's 16% return on equity is very strong for the industry and yet another indication of the company's intrinsic value.
The stellar 4.58% is one of the most attractive attributes of this stock considering the current market environment. Anytime you find a company that is growing and producing a high yield to go along with it is cause for celebration, but in a turbulent 2016, these qualities are even more attractive and difficult to find. Dividend paying stocks will outperform as they have historically done when the market declines as conservative investors seek the safety of dividend paying stocks, which bolsters them further and provides an earlier floor than most equities in the market when they eventually rebound. In other words, they are defensive in nature, which is the correct strategy for investors trying to preserve capital during a period of uncertainty.
In conclusion, as gas prices remain low, there will be continued increasing sales in the restaurant sector, which ARKR is benefiting from directly. The brand is clearly resonating with consumers based on recent growth and there is no reason to expect this will not continue. Finally, with a relatively conservative valuation of only 13 times forward earnings and trading at only 1.88 times book value with a high yield, the stock looks like a good bet for the current environment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
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