Luby's: Shawshank Redemption Or Fool's Gold?

| About: Luby's, Inc. (LUB)

Summary

Teflon coated when it comes to the onslaught of activist investors.

Its real estate holdings represent hidden value.

Still presents a viable Merger & Acquisition possibility.

Let me emphasize one thing. I have become a prisoner of Luby's (NYSE: LUB) for the past three years (at an average cost basis of $6.50) and I am seriously thinking about tunneling under the walls, for a Shawshank style escape (less the sewage). I have already been forced out of 20,000 shares near the $3.80 mark, due to a untimely margin call, but what the heck-timing is everything in the market, and lately my timing has been downright miserable. One consolation, is that since my last focus piece, at least the shares have risen 10%. There is no doubt, I have become way too enamored by the company, due to its apparent value status, and consequently have allowed emotion, to cloud my judgment. Could this investment simply be fool's gold? There is no doubt, in the case of Luby's, I am beginning to wonder, and whether I am destined for the rubber room.

The main reason I don't attempt to escape is, I absolutely loathe booking losses. It is a psychological thing, which in a sense admits defeat. The other reason, which is right up there, is the fear that my timing would be horrific, and the very next day, LUB would be involved in some sort of "Merger and Acquisition" scenario, which immediately tacks on 50% to its price. That would be too hard to take, so I am sticking around a bit longer, in hopes of a miracle, and my chances of diving into literal a pot of gold. The downside, is that most pundits admit, that if you have fallen into a "hope and pray" routine, your goose is probably already cooked.

The crux of the problem: the CEO is quite content to keep the status quo, after all, he is given a generous salary, and has time to run his private corporation (Pappas Restaurant Group) and further his empire. He can access the power that a public corporation allows him. One thing for sure, he doesn't treat Luby's as his private piggy bank, but the perception is, he is getting full time pay, for part time work. Think about it: what entity would he care about more? one in which he owns 33%, or one in which he possesses 100% beneficial interest? Maybe someday, he'll want to own 100% of Luby's too, and offer to take it private-stranger things have happened.

The Board of Directors basically works for him. His brother Harris, a former LUB officer, is also on the board of directors, and is joint owners with him, in the Pappas Restaurant Group. The Directors are in essence puppets, to his direction. They enjoy a six figure income for attending a few meetings per year. They are at the trough getting all they can. They know a good thing, when they see it, so why would they want to disrupt it. They are supposed to have a fiduciary obligation to look out for the best interests of all shareholders, not just the largest.

In reality, I own more shares than all the outside directors combined, so what is their incentive to see the share price spike? I am afraid, very little. They want no part of a sale or takeover, because their gravy train would end. The CEO also has friendly shares in his hands, that bring him over the 50% threshold, basically giving him carte blanch power to stop any takeover attempt he wishes. He already won a proxy fight eight years ago against the Ramius Group, so I am sure others will be timid to engage them again.

Why not do the right things for shareholder's? such as: (1) Getting serious about obtaining research coverage, (2) considering a share buyback program, (3) cutting expenses to the bone, (4) paying off the debt, (5) shopping the company to get the best price, either in pieces or as a whole, (6) attending investment conferences to attract more interest, and (7) launching a sale/lease back of its valuable real estate holdings (they own the land and structures on 93 locations with a market value over $100 million).

There are some developments worth highlighting: (1) They have been in late discussions with a large hospital operator, to provide culinary services at multiple locations for the past six months. (2) The shares have rallied over 30% from their 52 week lows, and now trade comfortably above their 200 day moving average line (3) its metrics are impressive, as the shares sell at just .34 of annual sales, and .84 of book value. (4) Third quarter results are expected to improve. Sales are estimated to increase 1% to $95 million, while earnings could rise 50% from .08 to .12, on lower costs across the board. (5) Institutional heavyweights such as Morgan Stanley, Goldman Sachs and Vanguard all upped their Luby's positions, according to their latest 12F filings. (6) Notable institutions taking initial positions in the first quarter, included: KCG Holdings, Quinn Opportunity Partners, FCA Corp., Deutsch bank, Millennium Management, Oxford Asset Management and Walleye Trading. (7) Probable pick up, of another 23 Fuddruckers franchise locations, within the next 18 months, is in the plans.

Second Quarter results revisited: The iconic eatery managed to generate a 2.2% increase in same store sales, despite their Fuddrucker's brand producing flat results. Sales were $92 million versus $91 million. EBITDA rose 42% from $3.3 million to $4.7 million, thanks to a 120 basis point fall in food costs and a 8% increase in franchise fees.

I wish I wasn't so stubborn, and could cut my losses, but you can't teach an old dog a new trick. How do I know that Luby's isn't the ultimate chunk of Fool's Gold? To me, Luby's is somewhat akin to insanity-as it does the same thing over and over again, expecting different results. It just doesn't work that way. The tragic thing? It kind of reminds me of someone-myself. The redemption? An investment which presents significantly more reward, than risk and the ultimate high, of hitting a very juicy, jackpot at the end of the day. I am ready for my escape to the promised land, and my redemption-a Shawshank Redemption that is.

Disclosure: I am/we are long LUB.

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.