COSI: Potential For Upside In This Beaten Down Restaurant Stock, With Definite Risks

May.24.12 | About: Cosi, Inc. (COSI)

Investing in COSI is not for the faint of heart. From a high of 10 dollars in 2006, the stock has lingered in the $1/share range since 2009 and currently sits at .85 cents a share for a market cap of $45 million dollars.

I recommend this stock as a speculative play. Cosi almost was kicked off the NASDAQ last year because the stock traded under $1/share for 30 straight trading days. We are approaching the 30 day mark again for COSI's stock trading under $1/share, as it dipped below this level on April 25th. However, NASDAQ as we all know is pretty busy right now with the whole FB IPO debacle, and as of yet there has been no indication from NASDAQ that they are reconsidering delisting COSI.

Regardless of where COSI is listed, I like it as an investment opportunity.

Here are the main reasons why I like this stock:

  1. The company is financially healthy. "Cosi reported that as of April 2, 2012 it had cash and cash equivalents of $4,813,000 and virtually no debt other than lease obligations."

  2. New CEO Carin Stutz. She invested $50,084.39 into Cosi on 1/27/12. Stutz has previous experience being at the helm of such iconic American restaurant franchises as Chili's (NYSE:EAT) and Applebee's (NYSE:DIN). Ms. Stutz seems like the perfect person to take COSI to the next level. I consider it a positive that Ms. Stutz, with all of her experience in the restaurant business, is confident enough in the business to invest $50,000 at the beginning of her tenure with the company.

  3. System-wide comparable restaurant sales for the first quarter as measured for restaurants in operation for more than 15 months recorded an aggregate 7.5% increase as compared to the first quarter of 2011. The breakdown in comparable sales between Company-owned and franchise-operated restaurants are as follows:

For the 13 weeks ended April 2, 2012: Company-owned 6.2%, Franchise-operated 9.5%, Total System 7.5%

    "The continued positive sales trend and improved operating margins in the quarter reflect our ongoing efforts to make Cosi a strong and profitable brand," said Carin Stutz, Cosi's President and Chief Executive Officer. "Our confidence is strong as we remain focused on driving sales and traffic while simplifying the guest experience, improving our operating margins and examining ways to further reduce our administrative costs."

    4. I like the restaurant. I am a believer in investing what you know. They've got great flatbread pizza, which I highly recommend.

Why you might not want to invest:

1. As I said, this stock is not for the faint of heart. If you are looking for a safe bet, look elsewhere. This stock is the opposite of a dividend player. This stock is for people who see potential in the COSI brand, wiho can afford to wait and see how this story develops.

2. COSI is still unprofitable. Despite the increase in same store sales, Cosi still lost just over a million dollars in the previous quarter. There is still a ways to go before this company turns a profit, and this stock necessitates having a long term perspective.

3.The current economic environment is not exactly conducive to growin. In what Paul Krugman calls a full blown depression, trying to grow a restaurant chain that is asking people to buy flatbread pizzas may be difficult.

Taking everything into consideration, I'm bullish on this stock. If you're interested, I think a stake in COSI right now could be a very lucrative investment down the road. The .85 cent/share price represents a great opportunity to buy a significant number of shares for not too much money.

Investing in COSI is a calculated gamble. At this point, the potential downside in investing in COSI is limited. There does not appear to be any near-term bankruptcy risk, and the company holds 4 million dollars in cash on hand. There have been talks of buyouts from Panera (NASDAQ:PNRA), though I wouldn't count on it. Nonetheless,this signifies that there is recognized value in COSI from a competitor. I do not see anything in the near-term that would cause a COSI investment to go to zero.

The potential upside, on the other hand, is huge. "From humble beginnings in 1996, one restaurant based on a small Parisian Café has evolved to a dynamic growth company with more than 100 restaurants in 16 states and the District of Columbia. The story continues to unfold as we plan and open many new restaurants across the country, making life more delicious for more and more people along the way."

If Cosi can establish itself in the future as a national brand approaching anything remotely close to Panera, or Chili's or Applebee's, people who invest now will be handsomely rewarded. A lot of the sentiment around COSI is negative and I am likely going to be derided for even suggesting that COSI can ever approach the level of a Panera or Chili's. However, I truly believe in the potential of COSI to expand beyond the 16 states it currently has a presence in. COSI has the right person leading the company, and this company appears to be heading in the right direction. If you have a little appetite for risk, COSI could be a great play.

Disclosure: I am long COSI.