Following up on yesterday’s portfolio update, there has been a decent bit of earnings announcements in my portfolio in the past few days. Specifically, Universal (UUU), Asta (ASFI), and Meritage (MHGU) all announced or pre-announced earnings. Here are my quick thoughts on each0 please refer to the links above if you’re unfamiliar with the names or are looking for more detailed write ups.
First up is Meritage (results here). I first wrote about them a long, long time ago (please note that they are a very small, very speculative portion of my portfolio. They are a very leveraged, very thinly traded micro-cap, so be careful when investing in them). Since that time, basically all of the thesis has played out except for the more speculative portion relating to their Bermuda real estate. As a simple valuation exercise, if you took their projected EBITDA for the upcoming year ($6.0-6.5m), and applied a 6x multiple to it (I did a very fast scan of 10 or so restaurants I found and couldn’t find a single one trading below 6x), you’d end up with a projected EV of $36-40m. After backing out ~$19m of net debt and preferreds, you’d end up with an estimated market cap of $17-21m, which would imply a share price of $3.10 on the low end. Simplistic, yes- but it also mainly ignores the value for their substantial real estate holdings.
Next up is Universal (UUU). The company reported solid, if unspectacular, earnings. Book value sits at $11.26 per share, more than double today’s share price of ~$5.60. Most importantly, the company is aggressively executing its buyback- they repurchased almost 2% of shares outstanding from October to today, an annualized rate of ~5%. Not bad.
Speaking of executing share repurchases, Asta (ASFI) is annoying because they continue to do the exact opposite. Despite tons of cash- net cash and investments sit just below $7.50 per share, or roughly today’s share price- and a deeply undervalued stock price, the company repurchased ZERO shares during the last quarter. I haven’t had a chance to listen to the conference call yet, but apparently they said they were in a quiet period relating to the new JV they were setting up. Maybe this is true, maybe it isn’t (last quarter, they said they couldn’t buy back shares due to trading restrictions. The answer appeared very flimsy to me)- but if it is true, why aren’t they announcing a huge tender to repurchase as many of their shares as they can right now????
Anyway, results here were again solid, if unspectacular. Because they haven’t been active in investing in new portfolios, most of their current recoveries are coming from zero basis portfolios. Still, cash flows are relatively strong, and there’s really nothing much to update here. The new JV sounds nice when viewed through management spin, but (and I could be wrong here) it looks like a terrible deal plagued by insider relationships. However, even if it’s a zero, it’s small relative to ASFI and ASFI would still be ridiculously undervalued.
Disclosure- Long ASFI, MHGU, UUU
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Hello:
I can think of 3 restaurants with E/V of less than 6:
A) Ark Restaurants (ARKR)
B). Flanigan’s Enterprises (BDL)
C). Mexican Restaurants INC. (CASA)
Please note that ARKR has a FORTRESS balance sheet AND pays a healthy dividend.
I think MHGU is a tremendous bargain. If my calculations are correct, MHGU is trading for a P/E of a little over 3.
Thanks for the idea!
Hey Roberto,
Thanks for pointing these out.
I think the concept of a fortress balance sheet in the rest. industry is elusive- ARKR has huge operating lease liability- however, i’ve always thought the company was interesting and it’s perenially been on my radar.
Casa, if i remember correctly, is extremely distressed, and Flanigans is quite levered and not a pure play rest. company. Of course, that my make them more appropriate comps!
Whopper,
Let me start off by complimenting you on a fantastic blog, I enjoy keeping up with your posts and looking into many of the interesting companies you come across, it’s great to be able to read someone else’s in-depth analysis on investment ideas and I think everyone is better off sharing information and kicking ideas around. Anyway, I’m also a fellow ASFI shareholder and listened to the conference call yesterday. You’re right about their explanation for not buying back shares, they said it was because of a “blackout” period surround the joint venture announcement. It’s disappointing to have a company announce a share repurchase program and show very little effort in moving it forward. The joint venture may turn out to be a good decision, but it only adds to uncertainty going forward. I know we’re working with a large margin of safety with the current assets and future cash flows compared to the market cap, but I just wish management would pursue something simple and more shareholder-friendly, i.e., actually buy back shares, increase the dividend. I’m curious to hear what your thoughts are going forward, especially in regards to the joint venture.
Thanks,
Deezy
Deezy,
As a fellow shareholder I echo your sentiments, the buyback situation is certainly frustrating.
As far as the new JV, I have a healthy amount of skepticism. The Pegasus webpage is here: http://www.mylawfunds.com/
The two principals are 31 and 27 and have been running the business since 2008. I wonder how much volume the business was doing before Asta came along, how much it needs to scale to do $20mm a year and if that increased volume will lead to deteriorating investment opportunities.
A couple of my other questions/concerns:
Does anyone have a sense of how long IRS audits can take, it has been ongoing since April 2010 and would like to see that resolved sooner rather than later.
Other Income was up dramatically in Q1 to $649K, thats more than it was for the entire FY 2011 of $557K, and up from $79K in Q1 2011 and makes up over 6% of revenue and 13% of EBIT. In the 10-Q, they make it sound like the change is due to interest income but that seems strange to me since cash/cash like assets didn’t meaningfully change.
“Other income amounted to $649,000 for three month period ended December 31, 2011 as compared to $79,000 in the three month period ended December 31, 2010. Other income consisted primarily of service fee income and interest income from the banks. Interest income increased due to the increase level of cash & cash equivalents, assets available for sale and certificates of deposit.”
Adam,
I’m surprised that other income number didn’t stand out to me when I read over the 10-Q. It is a substantial increase from last year but looks reasonable. With their, large cash balances if you assumed they had an average balance of 110m over the entire quarter and earned something around 1.5-2%, that gives you interest income of 412,000 to 550,000. I know that might be a little generous on the interest rate but apparently they earn some type of service fees that is categorized as other income as well. At least they’re putting that money to work. Makes me wonder what the heck they were doing last year, letting it sit in a checking account earning next to nothing?
-Deezy
Great thoughts! Thanks guys
Got to agree to the comments about buying back shares in ASFI. It’s a little frustrating that management continues to play these silly games. They are well aware of the need to buy back shares. They have announced a program for it and discussed it on calls. After last quarters excuse about buying all they could due to trading restriction (???) they now claim they were in quiet period for the whole quarter! One must wonder if management is simply not serious about buybacks but just talked about it as a way to get a few months more to find ways to expand the balance sheet and empire build with ventures like this new business of financing personal injury lawsuits.
ASFI management has really frustrated me on this issue in the last couple of quarters. Will be interesting to see how this develops over the next couple of quarters.
agreed. interesting to see if they put their money where there mouth is this quarter and buyback shares- no more excuses to use for this quarter.
See: http://www.investopedia.com/terms/r/rule10b18.asp#axzz1mB3T7dI5
Whopper:
Forgot to say, keep up the good work! I check your site almost every day. I very much appreciate the time you take to make it possible.
You are right, Flanigan’s does have a bunch of liquor stores, and an interest in a strip club.
ARKR does have exposure to operating leases, but I don’t know of any restaurant that does not. They have the best balance that I am aware of in the industry.
CASA has had difficulties, but at the right price it is not nearly as distressed as you think. They owe about $4MM in long term debt. Contrast that with sales of about $68MM. The whole enterprise value of CASA is $5.7MM. EV/REV is only .08. I don’t know of any restaurant that has a figure like that. They have had their debt renegotiated and it is not due until June 2013. Additionally, they have made small profits for at least the last two quarters. 5-6 years ago, this company was earning close to $1/share. If they can get things turned around, you’ll make MULTIPLES of the current stock price. Insiders own a TON, and they’ve sunk a LOT of money (relatively speaking) at MUCH higher prices. I’ve been buying my shares at $.50/share and below. Very hard to do, but not impossible. I think it is a tremendous speculation.
thanks! i’ve looked into all of them as potential investments before (i may have written flannigans up) but I will have to check again. They all certainly look cheap.
Wow:
I wonder what, if anything, is going on with MHGU today?
I got some more shares are $1.48/share. Not at the low, but very close. This is also only a few pennies more per share than what I’ve paid for previous shares. I bought my previous shares BEFORE this latest quarterly earnings AND 2012 outlook by management.
At $1.48/share, that is a P/E of UNDER 3.
The debt is higher than I would like, but it should be coming down somewhat. WIth earnings like this, book value per share has got to be going up significantly. Book value is probably near $1/share, but should go up to AT LEAST $1.50/share this upcoming year.
Is there something I’m missing? If not, this is the cheapest stock that I know of…
RE: ASFI
I think Friday’s announcement of the 10b5-1 plan is a positive, hopefully indicating that mgmt is serious about buying back shares. Based on the numbers in the press release, it seems like they bought back about 50K (about $380K) shares in the current quarter so far, which is nice start. Its too early to tell, but I’m more encouraged after the news than I was before.
No doubt it’s good news. Only one year authorization, so they may be buying back shares in a hurry!!!!