In my last article, I analyzed Noodles & Company (NASDAQ: NDLS), a small casual/fast food provider that has many significant valuation and cash concerns. During the same research assignment, I found yet another restaurant stock that shows similar traits.
Less than two weeks ago, the consumer confidence report from the University of Michigan showed that confidence was under economist's predictions and could be showing an underlying weakening in consumers. Additionally, the Iraq situation's effect on oil prices should likely aid in putting pressure on consumers as prices of gas will rise with oil. Considering that the majority of the U.S. economy depends on consumer spending, this could be a concern down the road if consumer reports do not pick up. At this time, consumer discretionary stocks are on my radar as potential sells due to the risk on the horizon.
As I mentioned earlier the stock that caught my attention as a risky stock to be positioned in is Luby's Inc. (NYSE: LUB). Luby's is the owner and franchiser of restaurants such as Luby's Cafeteria, Bob Luby's Seafood, Luby's and Fuddruckers.
Turning to the fundamentals, Luby's has a market cap of $143.09 million and currently has a 'hold' rating by analysts. Luby's is currently not in profitability, but forward price to earnings comes in at 100.8. Price to sales is undervalued at .36, price to book is undervalued at .83 and price to cash is overvalued at 84.17. The company has a total debt to equity of .21 and cash per share of .06, giving the company an extremely unstable current ratio of .4. Earnings are expected to decline 44.4 percent this year, rise 180 percent next year and 7 percent over the next five years. Performance has been dismal for Luby's with -42 percent in past year and -34.72 percent year-to-date.
The restaurant industry, as a whole, is experiencing pressures currently due to the slow recovery of the U.S. economy. Darden Restaurants, Inc.'s (NYSE: DRI) sale of Red Lobster should come as a realization to investors that consumers are becoming more picky and cautious with their cash. Restaurants that fit in a small niche such as Red Lobster (seafood) are continuing to face more extreme headwinds than restaurants that offer a more diversified menu. Unfortunately, Luby's owns restaurants that are considered niche and could face a continued decrease in earnings.
At a time when the overall health of the economy is in question and stock markets continue to barely hang on to their highs, restaurant stocks are not the place to put your money. Luby's even much more so due to their extreme lack of cash, no profitability, niche restaurants, poor performance and lack of consumer demand for eating out.
Be sure to do your own research before investing.