Nathan's Famous: Well-Known Brand, Unknown Stock

In business since 1916 when it was a Coney Island nickel stand, Nathan's Famous (NATH) is virtually synonymous with quality, all beef hot dogs and its annual 4^th of July hot dog eating contest. Nathan's history is commonly mentioned in fast food historical timelines - along the likes of McDonalds and Wendy’s – and featured in TV programs like The History Channel’s American Eats: History on a Bun.

Attesting to the chain’s brand loyalty, a Google search will return articles like Nathan’s Hot Dogs Stand the Test of Time, Everybody Comes to Nathan’s and other tribute pages where long-timers tell of their nostalgic, mouth watering experiences at the chain (and make you want to hunt down the nearest location). Nathan’s well stocked condiment bar reminds of being at the ball game, with their own brand of spicy mustard and high quality sauerkraut. Nathan's is also known for it's delicious krinkle-cut fries, which, I must say, perfectly complements the dog.

While revenues for Nathan’s 234 traditional restaurants grew at a respectable 8 percent for the 52 weeks ending March 31, newer initiatives by the company are increasing the overall growth rate to around 10 percent. The branded product program, which sells Nathan’s products at more than 7700 food service locations and over 7000 supermarkets, now accounts for more than 40 percent of the company’s revenues, and is growing at roughly 10 percent. The company’s recently launched “Frank and Fry” program are miniature outlet versions of the traditional restaurants, offering only the more popular menu items. Within the last year, 28 of these take-out units were opened. Additionally, Nathan’s announced last February that they will begin selling the dogs in special vending machines that grill the dogs and warm the buns in 34 seconds.

With a P/E of about 19, NATH is trading roughly in line with it peers (note that this is higher than the P/E ratio listed on many finance sites like Yahoo Finance; as noted on their most recent earnings release, 24 cents of their $1.01 earnings per share figure is due to a one-time gain. To get a more representative ratio, this .24 was backed out to get an EPS of .77. Thus, with today’s price of roughly 15, we get a P/E of 15/.77 = 19). McDonald’s (MCD) is trading at a P/E of about 26, YUM Brands’ (YUM) is at 19, and the overall industry P/E at a little over 16. But it should be noted here that the company’s top line growth of around 10 percent is higher than MCD (6 percent), YUM (8 percent) and the industry as whole (7 percent). Nathan's Return on equity is about 12 percent, and return on assets is about 8 percent, both of which are also in line with it’s peers.

The company has minimal debt, and a quick ratio (cash and short-term investments divided by liabilities) of nearly 6 - meaning its idle cash could cover its obligations 6 times over. This was the strongest ratio of all restaurant stocks, and explains the company’s “A” grade by Morningstar for financial health.

With a beta of -.17, the stock has a negative correlation with the market. NATH can thus serve as somewhat of a hedge for market-correlated portfolios, reducing overall portfolio volatility. This is purely a secondary factor for considering the stock, though, and those seeking a true hedge against today’s market volatility are advised to consider the inverse ETF’s discussed in this Seeking Alpha article.

At the helm of NATH since 2007 is Howard Lorber, an experienced leader who knows something about creating value. As a board member for Western Union, he played a major role in the companies restructuring, sending the stock from $1 to $240 in three years. He is also chief executive of Vector Group (VGR), and chairman of Prudential Douglas Elliman, a successful real estate brokerage. As noted here, Lorber owns over 600,000 shares, or roughly 10 percent of the company. I like to know that the people running the company have a stake, which creates extra incentive to make sure the company is a success.

NATH has a market cap of around $100 million - making it a micro-cap by most definitions, and putting it under the radar of most mutual funds. Thus, the stock is fairly illiquid (average volume is about 12,000 shares), and on some days only trades a few thousand shares. This results in a wide bid-ask spread, and makes NATH a better stock as a long term holding than a quick trade.

An undiscovered gem with no analyst coverage, Nathan’s strong brand loyalty, new growth initiatives and reasonable valuation make the stock worth a bite for long-term investors.

Disclosure: none

Comments

[abbyz1]

I agree with all your points and, in addition, I would net out the excess cash when looking at the P/E. There is close to $35m of excess cash or $5 to $6 per share. Net of excess cash you are paying about $8 or $9 per share vs 77 cents of EPS or less than 11x or 12x. Excess cash balances should continue to build up over time since there are few working capital or capital expenditure requirements here. Also you have a very smart lead investor in Steel Partners with close to 15% ownership. I agree that NATH is a good bet.