Morton's and Ruth's Chris: Eat a Steak, Take a Stake for Juicy Profits

Morton's Restaurant Group (MRT)__________________ April 24 close: $7.55
52-week range: $6.22 (Mar. 19, 2008) - $20.59 (Apr. 26, 2007)

Ruth's Chris Steak House (RUTH) ___________________April 24 close: $6.87
52-week range: $6.54 (1/11/08) - $20.82 (7/31/07)

These two high-end steak joints have a lot in common right now. Both cater to a well-heeled, mostly business crowd and each company's earnings have suffered lately from the slowing U.S. economy.

The bad stock market and recessionary concerns has driven the shares of both MRT and RUTH to near all-time low levels at approximately one-third of their former highs. I smell a 'prime' opportunity here for investors with a reasonable time horizon of 12 – 24 months.

Morton's was taken private by private-equity firm Castle Harlan for $71 million in 2002 when stocks in general were beaten down as they are today. They then brought them public again in 2006 when the market was hot with an initial market cap of about $338 million. Morton's share price in that first month of trading hit $20.25. A slightly higher high of $20.82 was hit in July 2007 right before the market collapsed under the sub-prime debacle. Morton's had EPS of $0.63 and $0.75 in 2006 & 2007 respectively.

Ruth's Chris came public in mid-2005 and traded as high as $23.06 early. In 2006 and 2007 RUTH shares hit peak prices of $24.61 and $23.00 which is a good guide to how the public views these shares when the macro environment is favorable. RUTH was headquartered in New Orleans until hurricane Katrina put a serious crimp in their operations shortly after they came public. Management permanently relocated to Florida and earnings rebounded to a record $1.01 /share in 2006 up from $0.47 in the storm effected 2005. Ruth's Chris earned $0.78 /share in 2007.

Both companies are expected to post lower earnings this year. The consensus view on Morton's is now $0.57 and it's $0.58 for Ruth's Chris. Why own them now then? Valuation. KDI Capital partners owned 9.6% of MRT shares as of the March proxy statement. KDI portfolio manager John Amendola said recently, "Typically business travel will recover faster" than consumer spending. He also noted that Morton's enterprise value of about $170 MM represented only about $2 MM per unit versus their estimated replacement cost of $3 MM per restaurant. He figures that Morton's stock is worth "very easily north of $11" a share. Even $11 would be a 45.7% move from today's close. Morton's CEO Thomas Baldwin said that while slower business travel was impacting business MRT had weathered economic downturns in the past and can do so again. He feels they're in excellent shape to take advantage when the economy rebounds.

Castle Harlan, the firm that took MRT private still holds 30% of the outstanding and there has been speculation they, or someone else might use the current share price weakness to privatize them again.

Ruth's Chris now trades at just 11.85x the already reduced 2008 estimate of $0.58 /share. This compares with (perhaps) overvalued multiples averaging 38x and 20x in 2005 and 2006. As with Morton's the share price now is likely well under replacement value for their 119 restaurant units.

There was an insider buy at $7 /share in March and an earlier larger insider buy of RUTH shares back in November at $12.41 /share. No insider sales have occurred since May 2007 at prices from $18.24 - $21.68 – double to triple today's close.

The bad economy and reduced near-term earnings expectations seem to be more than reflected in the share prices of MRT and RUTH. Even a partial recovery toward their old highs could see each of these up 40% - 60%. Potential buyouts of either of both add a wild card catalyst to the mix.

Disclosure: Author owns shares of MRT and RUTH.

Comments

[bonanza60]

Gee Paul, what are you thinking? Ruths Chris is doing soooo well they just fired the CEO at the Lake Mary, FL board meeting this week.

Bonuses to management were denied by the BOD as well, due to the company's poor performance.

No mention at all about the effects on climbing food prices vs. declining margins. I suppose all their raw food costs must be locked in at last year's prices.

You must really need our help. How deep are you?

Why should we believe any of these hedgies (KDI)that are underwater on large positions in the consumer disc. companies? Talk about zero credibility!

P.S. GL on your trade.

[bonanza60]

Sorry, forgot to post a link: www.orlandosentinel.co...

[stocktrader1]

<< Ruths Chris is doing soooo well they just fired the CEO at the Lake Mary, FL board meeting this week. >>

So when things are bad, making changes is bad?

<< Bonuses to management were denied by the BOD as well, due to the company's poor performance. >>

So giving a bonus to mangement when they miss targets would be a good thing?

<< No mention at all about the effects on climbing food prices vs. declining margins. I suppose all their raw food costs must be locked in at last year's prices. >>

No, the raw food costs are not locked in, but thwy are built into the 2009 numbers. Not to mention, beef prices are down 20% in a year.

<< Why should we believe any of these hedgies (KDI)that are underwater on large positions in the consumer disc. companies? >>

I would trust them most than I would trust someone who used the word 'hedgies'.

[Paul Price]

Both companies are still solidly profitable.

I did note the headwinds from the slow economy.

At 1/3 of their former highs and selling for way under restaurant 'replacement value' these shares look go to me for investors with a 1 - 2 year time horizon.

Buyouts are possible, but not neccessary, to see much higher share prices over time.

[Egg]

One note about Morton's:

When it was purchased for 74M, Harlan also assumed 100M in debt bringing the total enterprise purchase price to ~174M.

Today MRT's market cap is 134M + 47M in debt = 181M.

So MRT is at approximately the same price...and if you factor in the fact that revenue has grown from 250M to 350M, you can argue Morton's is cheaper today.

Comparing the two, I would choose Morton's myself mainly because Ruth made a very expensive debt purchase last year near the peak.

[Paul Price]

The point is that they 'stole' it in 2002 when the market was ultra depressed and it's even cheaper now than it was then.

A good time for a repeat of screwing public shareholders by privatizing when shares are very depressed and keeping the upside for the P.E. guys.

Your point about RUTH perhaps overpaying for their Nov. acquisition seems valid but it's not a deal buster for me.

[BoulderBiker]

Love the restaurants, hate the stocks.

[investorslive]

RUTH on breakout watch:

www.investorslive.com/.../

[beezlebub]

to start, i am long ruth's and am looking to enter mrt. in the current environment high end consumer discretionary names, or extra highly discretionary names, tend to perform weakly....nothing surprising about ruth and mrt's results. i am looking forward to improving results, a 'when' not 'if' and the accompanying equity returns. when the tide shows signs of shifting, rotation into names like ruth and mrt will occur. i do find it amusing reading speculation that these stocks (and others) are a waste of time. patience may be required (a year or so, not a decade) and it should be well rewarded.
ruths purchase of the seafood chain, perhaps ill- timed (perhaps not) was somnewhat of a surpise. but cost reductions (mostly back office in this case) provide some offset to the meaningfull increases in commodity costs. (i have to add that this is not my though, but i agree with dri's ceo as he recently characterized his own foray into the beef sector). Bottom line, i see no reason why the company should not perform exceptionally well from an equity standpoint, it has been pointed out, they generate cash even in these weak times. as for a takeover, could happen, but ruth's leverage is an obstacle here.