Nathan’s Famous: This Dog Can Hunt

On Friday, Nathan’s Famous (NATH) reported results for the 4th quarter and full year ending March 25, 2007. Newsday described the company’s results as follows: “Money poured into its coffers in its fiscal fourth quarter almost as quickly as hot dogs get swallowed at the company's annual Fourth of July eating contest.” Indeed, to put it more succinctly, I would have to say that this dog sure can hunt.

For the 4th quarter, total revenue from continuing operations increased 12% to 9.9M, net income from continuing operations increased 111% to 1.2M, and diluted EPS from continuing operations increased 111% to 0.19. For the full year, total revenue from continuing operations increased 11% to 45.7M, net income from continuing operations increased 34% to 5.2M, and diluted EPS from continuing operations increased 39% to 0.82.

The past four years have seen impressive growth in revenue, net income, and earnings per share.

Revenue from continuing operations:

2004: 30M
2005: 34.2M (14% increase)
2006: 41.2M (20% increase)
2007: 45.7M (11% increase)

This translates to a compounded annual growth rate of 15%.

Net income from continuing operations:

2004: 2.0M
2005: 2.8M (40% increase)
2006: 3.9M (39% increase)
2007: 5.2M (33% increase)

This translates to a compounded annual growth rate of 38%.

Diluted EPS from continuing operations:

2004: 0.36
2005: 0.46 (28% increase)
2006: 0.59 (28% increase)
2007: 0.82 (39% increase)

This translates to a compounded annual growth rate of 32%.

Considerations which might aid in valuing the company:

Share price: 15.79 (on Friday, the stock rose 5.3% on four times the average daily volume)
Market cap: 93.2M
Cash: 29.7M
Long term debt: 0 br />Enterprise value: 63.5
EV/revenue: 1.4
PE:19
Owner earnings (net income from continuing operations + D&A – capex): 6.1M
EV/OE: 10
Return on equity: 14.5%

If we assume a 20% growth rate over the next five years, which is considerably lower than we have seen over the last four years, we compute a PEG of .95 and (EV/OE)/G = .5.

A DCF calculation with the following inputs:

1. Owner earnings: 6.1M
2. Growth rate in years 1-5: 20%
3. Growth rate after year 5: 3%
4. Discount rate: 11%

These numbers yield a fair value of 29.09. Thus, with the assumption of a 20% growth rate, the current price represents a 46% discount to the DCF value. Reverse engineering a DCF calculation shows that the current price reflects the assumption of a 3% growth rate for the next 5 years and 0% thereafter.

I hold a position in Nathan’s and have been following the company for about a year. It has a small float, is thinly traded, and there is no analyst coverage. Nathan’s is a fast-growing company with strong fundamentals that are overlooked by Wall Street as its current price fails to reflect the company’s future potential.

Disclosure: Author has a long position in NATH

NATH 1-yr chart