Nathan’s: Like Buying a Hot Dog For a Nickel

Nathan’s Famous (NATH) has just reported the results of the first quarter of its 2008 fiscal year.  Revenue from continuing operations grew 10.2%.  This is weaker than the revenue growth the company has been experiencing the last few years:

2005: 14% revenue growth
2006: 20% revenue growth
2007: 11% revenue growth

Net income from continuing operations grew 16.5%.  This, too, is weaker:

2005: 40% growth in net income from continuing operations
2006: 39% growth in net income from continuing operations
2007: 33% growth in net income from continuing operations

Diluted EPS from continuing operations grew 15.8%.  By comparison in recent years we have seen the following:

2005: 28% growth in diluted EPS from continuing operations
2006: 28% growth in diluted EPS from continuing operations
2007: 39% growth in diluted EPS from continuing operations

So, things seem to have definitely slowed down this quarter.  My previous valuations of the company have tended to show that the stock has generally been priced at a level which reflects an assumption of little or no future growth.  I am disappointed to see that, for this quarter at least, the company has moved in a direction which gives some validation to that assumption.

As of market close on August 8, the day of the earnings release, the price stands at 17.75, having dropped 4% from the previous close.  The market cap is 106.8M.  With cash and marketable securities totaling 31.4M and no debt, the company sports an enterprise value of 75.4M.  With TTM revenue of 46.9M, we have an enterprise-value-to-revenue ratio of 1.6.  With TTM diluted EPS (from continuing operations) of .85, we have a PE of 21.

TTM owner earnings, computed as net income from continuing operations + D&A – capex, stands at 6.1M which gives an enterprise-value-to-owner-earnings ratio of 12.4. At a 16.5% growth rate in net income from continuing operations, we have (EV/OE)/G = .75.  Under this metric, the stock appears attractively priced.

An assumption of 16% growth over the next five years, 3% terminal growth, and a discount rate of 11% produces a fair value of 27.27.  The stock is currently trading at a 35% discount to this fair value.  A reverse DCF calculation shows that the stock is still priced under the assumption of essentially no growth.

Disclosure: Author is long NATH.

NATH 1-yr chart:

Comments

[Jakester]

Insiders don't seem to be too enthusiastic about NATH. No insider purchases in over two years....