There’s an incredible industrywide recovery going on right now, even if most investors aren’t seeing it. And there’s one company in that group making more out of the recovery than most of its peers, though most investors are overlooking it as well.
The rebounding group is restaurants — an arena that usually brings larger names like McDonald’s (NYSE:MCD) or Darden (NYSE:DRI) to mind. But investors looking to get the most growth out of this sector may want to consider off-the-radar small cap stock Ruth’s Hospitality Group (Nasdaq:RUTH), a chain of 152 full-service restaurants, most notably Ruth’s Chris Steak Houses.
On the surface, the company may not look all that impressive — the company’s profit hit its lowest point in years in 2010, for example.
Why own a stock that’s apparently facing more and more of a headwind, not to mention one that has fallen by 75% since early 2008? Simply put, you own companies for where they’re going rather than where they’ve been. Where Ruth’s Hospitality has been over the past three years has admittedly been nowhere bullish. But if estimates are right about 2011 and 2012 – and they’re probably in the ballpark – the company’s future is much more compelling.
For 2011, analysts see an earnings jump of 36 cents a share, outpacing growth forecasts for competitors Cracker Barrel
(Nasdaq:CBRL) and Bob Evans (Nasdaq:BOBE).
It’s in 2012, however, when Ruth’s Hospitality Group is really expected to take flight, with Wall Street expecting 45 cents a share in profit.
Of course, forecasted numbers are one thing — the ability to deliver on the promise is another. It’s the non-headline details that make this seemingly-mediocre chain of steakhouses and seafood eateries something more bullish going forward, and able to carry the company toward 2012’s lofty income goal.
One of those details is the number of total entrees served; it was up 3.9% for the first quarter, and has now grown for the past five quarters. The size of the average check in the first quarter was up 1.2%. Meanwhile, overall same-store sales were up 9.3%, and total revenue was up 4.4%. The company believes that growth has a lot do with a rebound in demand for high-end dining.
It’s not just improving restaurant metrics that are painting a bullish picture, though. The company says 17 new franchisee-owned units are slated to be opened over the course of the next few years, which would push the total to 81.
All this data forces the question, if Ruth’s Hospitality is entering such a high-growth phase, why isn’t the market going nuts over it yet? There are two reasons:
For starters, it’s a small company with a market cap of only $172 million. As such, a lack of widespread ownership means the media doesn’t see much point in giving it any real coverage.
The second – and perhaps more important – reason is that investors are taking a “wait and see” approach. McDonald’s already has a proven growth trend (profits as well as sales) in place. So does Darden, along with several other names in the food-service space; there’s nothing those companies have to prove. Ruth’s, however, still has doubters.
While the hesitation is understandable, it may ultimately be detrimental to newcomers. By the time the company proves it can meet its growth expectations, the stock may be significantly higher than where it is now. No risk, no reward.
At the time of publication, James Brumley didn’t own shares of any company mentioned in this article.
