Why Kona Grill Could Be Next On The Trading Block

| About: Kona Grill, (KONA)

Benihana (NASDAQ:BNHN) became the latest restaurant chain to go private or be bought out today joining Morton's and PF Changs (NASDAQ:PFCB) among others. It seems this sector is becoming very active for M&A with premiums paid generally being in the 25% to 40% range. There are numerous possibilities for the next target. One restaurant group I like here is Kona Grill (NASDAQ:KONA)

7 reasons KONA offers value at under $8 a share:

  • The stock is selling at 70% of annual revenues and around $3mm per restaurant, similar valuations to Benihana before it was bought out at a premium.
  • The company has substantially beat earnings estimates for the last six straight quarters as analysts consistently underestimate its earnings power.
  • These earnings are expected to move up sharply. The company made 28 cents a share in FY2011, but analysts expect 47 cents a share in FY2012 and 53 cents in FY2013.
  • It trades for under 15 times forward earnings, a significant discount to its five year historical average.
  • KONA has a solid balance sheet with approximately 10% of its market capitalization in net cash. It also announced a buyback plan that should retire around 8% of its outstanding float.
  • The four analysts that cover the stock have a median price target of $9.50 a share on KONA.
  • Given its small market capitalization (under $70mm) and a less dated concept than Benihana, this would be a bite size, logical acquisition for a PE firm or larger player in the restaurant space.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.