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Ruth's Hospitality Group: The Valuation Article

May 01, 2020 11:32 AM ETDarden Restaurants, Inc. (DRI)12 Comments
DOCSHAH FINANCIAL profile picture


  • This article will offer not one, but four different valuations depending on if you are a pessimist, realist, optimist, or chartist.
  • Ruth's EPS has grown by almost 20% per year for the past eight years. Despite this fantastic performance, the company trades at a significantly discounted 7.8 TTM P/E.
  • In fact, the company is so undervalued, even the pessimistic investor has an opportunity to make double digit returns. The rest of us have an opportunity to double our return.


I have spent the last three articles describing why Ruth's Hospitality Group, Inc. (RUTH) makes an exceptional investment. In my first article, I went through the company's cash position and determined the company has sufficient liquidity to make it through the year. In my second article, I explained how management has done a great job of consistently growing the business. Finally, in my third article, I did a full-on competitor comparison, which exhibited that Ruth's was the best company out of the bunch in regards to analytics, margins, and risk/reward metrics.

Now that we have determined the company is solvent, has skillful management, and is stronger than competitors, it is time to value the business. I will present three discounted cash flow models; one for the pessimist, one for the realist, and one for the optimist. Then, I will present in-depth technical analysis and a valuation using FAST Graphs charts and data.

Ruth's is a great buying opportunity for whichever category you fall under. All four types of investors have an opportunity to make a positive return.

DCF Valuation - Pessimist's View

Here is an explanation of how I set my assumptions:

  1. Sales: set off pessimist's/realist's/optimist's viewpoint until 2025, where sales resume normal historical rates
  2. CGS % Sales: set off historical rates
  3. SGA % Sales: set off historical rates
  4. Effective Tax Rate: set off the Tax Cuts and Jobs Act
  5. Net CA % Sales: set off historical rates
  6. CAPEX Growth: set off historical rates
  7. CAPEX (net of depreciation): set off historical rates
  8. Cost of capital: calculated
  9. Terminal Growth Rate: set to keep up with inflation
  10. Net Present Value: set at 7%

With that out of the way, let me quickly explain DCFs. These models project all the future cash flows of a company and discount them back into present value

This article was written by

DOCSHAH FINANCIAL profile picture
DocShah Financial, LLC is a full service registered investment advisory firm. To have your portfolio created or reviewed by Raul Shah, please click on our website link below. Disclaimer: All writing presented is solely for entertainment purposes and not financial advice. Neither DocShah Financial nor its representatives are responsible for any financial outcome which may occur. We do not give out investment advice to the public nor any any individual, unless they are a client under our advisory services and subject to the terms and conditions which apply. www.docshahfinancial.com

Analyst’s Disclosure: I am/we are long RUTH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Neither this article nor any comment, message, video, or interaction associated with it is to be taken as financial advice. Investors should always do their own research before executing any financial transaction. Raul Shah is not liable for any financial outcome which might occur. Investors assume full responsibility for their actions.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (12)

The error in your valuation model is that you have costs as 100% variable, which is not the case and is misleading as there is no way RUTH gets out of 2020 without a loss. for this model to have any credibility, you need to model 2020 with the cost base as they have it today. then see if they can plug the funding gap without killing their equity.
great article, thank you
Dividend Value Investor profile picture
Jesus...someone please tell the author that, not only is there a global viral pandemic impacting ALL discretionary companies generally but it forced the closure of ALL of Ruth Chris’ dine in functions, specifically!

Closed. As in NOT OPEN to paying customers!

BLMN had reported weeks ago that same store sales are trending down 50-70% and the author believes that RUTH earnings will be impacted by less than 10%?! Additionally they noted that their cash burn rate was $8-10M...per week!

Ruth Chris has $58M cash after drawing down their revolver fully and being forced to give back the $20M PPP money. At half the burn rate of BLMN, they have about 10-12 weeks of operating capital remaining...and the restaurants have been closed for at least 5 weeks now...you can complete the math on when they’ll run out of money.

Moreover, 30M Americans have lost their jobs in the past 6 weeks. And that doesn’t include the growing number of white collar jobless that do not qualify for benefits.

We’re going to be around 20% unemployed less than two months into a lockdown...that’s still continuing!

How many of these people will be UberEating those $60 steaks?

During the credit crisis, peak unemployment hit 10.2% in October 2009. The S&P 500 went from an October 2007 high of 1,550 to 735 by February 2009, a drop of over 50%!

Back then, ALL of Ruth Chris’ restaurants were OPEN and the stock price hit a low of $0.74 on March 2, 2009.

Given the current economic backdrop that includes:

1) mass unemployment
2) negative GDP growth for the foreseeable future
3) a broken supply chain
4) risk of inflation as the Fed continues to print money to fund their “socialism packages” — read: inflating asset prices exorbitantly above their fundamental value
5) risk of higher taxes to fund municipal/state shortfalls
6) risk of another credit/housing crisis as more people lose their homes and companies declare bankruptcies.

I would expect a more realistic price target of $0.50.
mzagotti profile picture
Ouch 0.50! - I don’t see that happening. Once states start coming back online and resuming to the new norm - people who are tired of cooking 3 meals per day will likely visit upscale restaurants etc. I hear it all day long from my network - where to go eat and drink etc. RUTH will get some of that attention. I don’t own RUTH have been following for a potential entry. I would place the stock in the near term at 14-17
Dividend Value Investor profile picture


The +30M that are out of work and the tens of millions that have received a one-time $1,200 check can't wait to visit "upscale restaurants".

And when exactly will that be? Soon?

Is that your investment thesis? Soon? One day?

Let me see if I can cut through your riveting analysis...

...you think that a stock in the economic environment that we're currently facing will return 40-70% from today's price and you don't own it?


Let me ask you...when they report earnings on May 8 while ALL their restaurants are still closed, having already suspended their dividend and withdrawn guidance, what catalysts are you expecting them to announce?

Perhaps that "once states start coming back online and resuming to the new norm - people who are tired of cooking 3 meals per day will likely visit upscale restaurants etc"?

How do you think that the market will respond to that nonsense?
This is way too pessimistic. Who cares what BLMN is doing, read RUTH's 10k.

Key things to keep in mind:
Food and beverage costs: 127,597,000
Total restaurant operating expenses, for 1 year: 214,715,000

2020 total lease liabilities,operating and variable(for the whole year, part of operating expenses):

This is what basically pays the building lease and equipment rents. Some of their leases also have contingent rent provisions based on annual sales.

Marketing and advertising of 15,432,000 is probably 100% cut.

So ... assuming full operation, total costs and expenses are 415 million dollars for a year. Divide by 12 and you get 34 million a month, before a single cut or allowance is made.

Food and beverage is pretty variable, lets cut it by 75%

So, 31,899,250 Food
General and administrative, 34,643,000, lets assume this has no changes.
Lease cost is 37,877,000, assume no cuts, nothing that may reduce rent or forbearance or anything.
Assumed remainder of non lease operating expenses ... 64,067,000(math is near bottom)

Total is 168,486,000 / 12 = 14 million dollars a month burn.

However, they are still doing business, which I did not account for. They closed about 29 locations that were unable to even meet fixed costs. The rest are still open, and it is safe to say that the open stores are making enough to pay fixed costs, or they would close. You likely can back out 70% of the lease cost from the burn, which probably puts the monthly burn closer to 10 million a month.

The rest .... is "operating expenses". On average, labor - 30% of revenue, so 124,500,000 of operating expenses is labor. Management said they would take temporary pay cuts, and they probably laid off lots of people, so lets cut this down by 75% = 31,125,000 yearly labor cost.

So, 37,877,000 + 124,500,000 = 162,377,000 .. 52,338,000 operating costs unaccounted for. Lets assume we can cut those by 50% =26,190,000

This is not to mention, these guys have a pretty clean balance sheet. They have no debt besides their revolver, and very little in the way of interest costs. They would be a good candidate for a bank to loan to in a pinch, they had a healthy, profitable business before this that generated excellent FCF and would likely get an investment grade rating from an agency if they issued bonds.
astute pathways profile picture
I wonder how the beef shortage will play out....
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