Wednesday, May 21, 2014

Where to invest in breakfast

The thought occurred here that the baby boomer aging trend may be good for breakfast.  What percent of boomers now wake up early with little chance of falling back to sleep?  Do they have spouses, former co-workers, friends, and acquaintances who have the same pattern.  Where does one go for a cup of coffee and a place to wish a few folks good morning?  Where does one get, relatively speaking, the most affordable good meal of the day?  It's all at your local diner or in many cases at those chains of restaurants that focus on the morning meal.

That English muffin toasted with butter and jam, the plate of eggs, with toast, with hash browns, with grits, with bacon, with link sausages, with a slices of tomato, with whatever, it's a potential for a heartstopper breakfast that some would say is worth the risk.  What about oatmeal with brown sugar and raisins and some grapefruit, or some cream of wheat with a bowl of cantalope, maybe that's the healthy ticket.  Or one could go the fill me up route too with pancakes, waffles, syrup, or whipped cream, add strawberries and blueberries to pretend it's healthy, anything goes.

This should be a growth business if demographics and social inclinations mean anything.  While this often can be a good entrepreneurial local business, the large chains dominate the highways, interstates, and suburban areas.  For those chains that are private companies, there is little way to invest in whatever opportunities they are seeing.  Companies like Waffle House, Biscuitville, and Huddle House seem happy to be on their own so business must be all right.  For national chains that are publicly traded, the business does not look that easy for some.

The firms looked at here are Bob Evans(BOBE), Denny's(DENN), Cracker Barrel(CBRL), and Dineequity(DIN).

Bob Evans looks like either a train wreck happening or a huge opportunity if a few important things fall in place, by force or by luck. Shorts cover 12% of the share base. The company is not making money of late and it appears to desperately need a new committed bank line, as virtually all of its debt has moved to short term.  It does have $486 million of shareholders equity on a $1.1 billion balance sheet, not bad, but that balance sheet has $512 million of current liabilities.  On top of the obvious financial issues, the CFO recently resigned and one of its top institutional shareholders is challenging three new board members as inappropriate, citing years of poor corporate governance.  The company has a chance, but seems to need a severe management arm twist to see the light.  This is a play for investors with a high risk tolerance, meaning if things do by chance work out, there should be a high return.  Dividend yield is 2.6%.  Shareholder base is relatively weak apart from L.A. based NWQ, where Jon Bosse, a thorough value based investor who was once well known here, is co-president and Chief Investment Officer. That unique aspect to the shareholder based is accurate unless one knows good things about BOBE's largest shareholder, River Road Asset Management of Louisville, KY.  I have no information, but once did like the take-out from the Kingfish Restaurant nearby.

Denny's has an amazing balance sheet and not in a good way.  It has $6 million in shareholder's equity on its $288 million balance sheet.  Fortunately $166 million of that balance sheet is long term debt. There have been revenue declines over the past five years but the last five quarters have been flat.  The company turns a modest, as in really small, profit each year.  Securities analysts are almost uniformly bearish but, a shock, the top ten shareholders include Fidelity, T Rowe Price, Wells Fargo, and Brown Advisory.  There must be something that is not known here, some intangible like promising management?  I don't have the foggiest because on the surface things look bleak.  There is no dividend and but short interest is just 2.9%.  If you like the food and morning atmosphere, then take a walk on the wild side and buy a few shares of this stock.

Cracker Barrel trades at around $97, well below its $118 high for the last 52 weeks.  The dividend yield is a rewarding 4.2%.  Short interest is at 4.7%.  Revenue has grown modestly but steadily over the past five years, each of which has been reasonably profitable.  P/E ratios do not seem to be inflated, especially relative to industry peers.  Everything looks like an anomaly for this industry, meaning it looks good.  The wild card here is that 20% if its shares are owned by Biglari Capital or Biglari Holdings.  These are the successful investment vehicles of the aggressive Sandar Biglari.  This is my first introduction to Biglari, and have no way to predict how this will affect future performance of CBRL.  At the moment it is definitely putting pressure on management but whether in a constructive manner is not known.  Still, given the long term thesis here about the breakfast business having a demographic growth aspect to it, this is an interesting stock. Summer car travel season is just beginning.  Cracker Barrel's tourist chachka business will thrive.  Surprisingly, a toe was stuck in the water here as this casual research was being done.

Dineequity was included here because it is the holding company that owns International House of Pancakes or IHOP.  Its other major holding is Applebee's, which is even larger than IHOP.  Making an investment primarily based on breakfast here is not possible, and information on the IHOP financials as a subsidiary are not available here.  So why is it written about.  Solely because it has IHOP, which is too ubiquitous to ignore.  Dine Equity as a whole does not look like a stock to buy at the moment, but it is does not appear to be overly stressed.

Time to hit the hay, and for breakfast tomorrow it will be...home or Louie's, the local town diner.



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