The Long Case For Rubio's

| About: Rubio's Restaurants, (RUBO)

Rubio's (RUBO) operates as a Mexican-theme restaurant, serving quality fresh food such as fish tacos (their specialty), nachos, burritos, and the normal Mexican food. Recently they started opening new restaurants, and they now have a total of 161 restaurants in operation (156 company operated, 2 franchised, and 3 in non-traditional locations, such as airports). Rubio's was founded in 1983, and their restaurants are currently in California, Colorado, Utah, Nevada, and Arizona.

I went to Rubio's on a Friday at a bit after 2:00 PM. The place was busy, the ordering process was quick and friendly, and the building was clean and in nice shape. The food was great, and that's what counts. It's a Mexican-fast-food restaurant that actually tastes like Mexican food - or much closer to it anyway. The food is definitely a higher quality than Taco Bell.

The 4Q 2005 net income was negative (haven't been able to find out why, yet), which is why the TTM EPS is currently -$0.13. However, this coming 4Q should be a much better one, and will push the EPS into positive territory. The P/E will probably be high when this does happen, so the current price ($9.85, market cap $96.28 million) may be a little bit expensive. Earnings have been positive for the past three quarters after the negative 4Q 2005.

What I really like is cash flow. Since going public in 1999, the company's really only used cash flow from the business to finance growth. In fact, since going public, the company's never needed more than what the business produces. This is a very good sign to me, especially since this is a relatively new restaurant with increasing expansion. Here are the cash flow from the business numbers for the past four quarters (in millions):

rubios cash flow

The balance sheet is another piece of the financials I really like as well. The company has no debt and $11.52 million in cash. The company's never had any debt since fiscal 2003, and the most debt they've had since 1999 is $1 million. Another impressive number that really makes me interested in the company.

Earnings have grown since the poor 4Q 2005 quarter, cash flow has been producing very strongly and steadily, and the balance sheet is very strong. Rubio's has a nice foundation and the resources to keep expanding, and boy, do they have a lot of opportunity! If cash flow was negative, I'd be less interested, but since it's producing strongly and financed growth since 1999, I'm very interested.

Ralph Rubio, chairman and co-founder of Rubio's, owns 947,559 shares, or approximately 10% of the company.

With pre-opening expenses, it costs Rubio's approximately $750,000 (this is definitely the high end of what it'd cost) to open a new restaurant. The company is still targeting new restaurant openings of 10% to 15% in 2007, according to the 3Q report. This means approximately 15-20 new restaurants in 2007, and with the $11.52 million of cash on the balance sheet and strong cash flow producing business, this will be pretty easy for Rubio's to finance. This is why I'm so interested in Rubio's -- they've got a great concept and a good foundation, and they have the resources to expand with ease (relatively, of course).

The company expects CapEx in 2007 to be between $12 million to $14 for "restaurant openings, restaurant re-imaging, maintenance, and corporate and information technology."

3Q 2006 highlights

Note: Sales/income are down year-over-year because of development and new restaurant openings, but as I mentioned earlier, Rubio's can finance this. It will impact results in the short-term but help long-term results if all goes well, and I think it well.

  • Opened three new restaurants in the quarter
  • Pre-opening expenses $188,000
  • Revenues increased by 6.1% to $38.8 million
  • Cost of sales increased to 27.8%
  • YTD revenues in 2006 increased by 4.4% to $111.0 million
  • YTD recorded a comparable store sales increase of 1.0%
  • Rubio's wide re-imaging program was initiated last year -- completed 33 restaurant re-images in the 3Q and 65 YTD, bringing the total to 92 re-imaged restaurants as of September 24, 2006
  • Net income $1.2 million
  • EPS $0.13
  • Cash $11.52 million
  • No debt
  • Generated $7.1 million in cash flows from operating activities for the 39 weeks ended September 24, 2006
  • Other notes related to the company, but not 3Q:

  • Our business strategy is to become a leading brand in this industry segment
  • Restaurant re-imaging typically costs between $50,000 and $70,000 per unit
  • We also continued to invest in technology in the kitchen to improve order throughput, as well as other items to improve the overall guest experience
  • We believe that the anticipated cash flow from operations combined with our cash and cash equivalents balance of $11.5 million as of September 24, 2006, will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next 12 months.
  • On a YTD basis, branding initiatives, such as increased fish portions and enhanced flavors, impacted the cost of some premium products
  • There was a store closure reversal of $247,000 in the 2Q 2006, the only one in 2006
  • Rubio's was affected by the 2006 sell-off, hitting a 52 week low of $6.92 on August 6, 2006. Since the market has been on a nice upswing lately, I think we best wait for a price under $9 with Rubio's. The business is producing strongly, the new CEO they brought on this year has years of experience in the food industry, and they've got the resources to comfortably expand and meet their goals this year. They also have a nice foundation, so I'm definitely interested. A price around $7 would be ideal to me, and a price below $9 would be tempting for a starter position.

    RUBO 1-yr chart

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