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Einstein Is Brilliant Restaurant Stock

Einstein, backed by top-ranked investors, serves as an attractive value stock while the company expands.
Author:

BOSTON (TheStreet) -- Small-cap stocks are in a bad place, as investors are favoring safe-haven fixed-income securities because of the wobbly U.S. economy.

The

Russell 2000

tumbled 4% yesterday as the U.S. trade gap widened more than economists expected, prompting them to lower their forecasts for gross domestic product growth. Yet, pessimism creates opportunity for value investors.

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Einstein Noah Restaurant Group

, whose ticker denotes its principal product, has risen 9% in 2010, beating the Russell 2000. (Einstein has declined 2.4% since tracking started of the

Under-the-Radar Top 10 Portfolio

on March 1.) Although the company registered lackluster quarterly numbers, its stock remains an attractive value. And the unwavering support of hedge-fund manager

David Einhorn

, whose

Greenlight Capital

is Einstein's largest shareholder, is a reassuring sign to individual investors.

Second-quarter adjusted profit decreased 23% to $3.1 million, or 19 cents, from $4 million, or 24 cents, a year earlier. Revenue declined marginally to $103 million. The gross and operating margins remained steady at 20% and 7%, respectively. System-wide comparable store sales declined 1.1% and company-owned same-store sales fell 2.2%. Although quick-casual favorites

Chipotle

(CMG) - Get Report

and

Panera

(PNRA)

boosted comparable-store sales by high single-digit percentages, Einstein's shares are significantly cheaper than those of the restaurant darlings.

Management is aggressively expanding. Einstein opened one company-owned restaurant, four franchises and four license restaurants during the quarter. It plans to open 10 to 12 company-owned, 12 to 17 franchises and 35 to 46 license restaurants this year. Franchise and license revenue increased 17% during the quarter, ranking as the leading sales category. The company's balance sheet has improved since the year-earlier quarter. Last year's shareholders' deficit has turned into shareholders' equity and the cash balance has more than doubled to $10 million since the year-ago period.

Einstein has attracted a slew of loyal shareholders. Greenlight holds almost 11 million shares, about 65% of those outstanding.

Royce & Associates

, a small-cap investment specialist, is the next largest shareholder, with 3.9% of shares outstanding. It enlarged its position in the latest quarter while

Fidelity

initiated a 1.8% stake. Greenlight's huge bet on Einstein has attracted a slew of sell-side analysts who normally wouldn't cover a restaurant stock with a paltry market value of $180 million. Technically, Einstein is a micro-cap.

Greenlight's flagship fund has returned 22%, annualized, since its 1996 inception, easily outperforming U.S. stock-market benchmarks. Consequently, analysts take note of its long positions, even those in miniscule companies. Of the researchers following Einstein, four, or 50%, rate its stock "buy" and four rank it "hold." A median price target of $15 suggests a return of 45% in the months ahead. Consistent with the median target,

Jefferies

(JEF) - Get Report

,

Piper Jaffray

(PJC) - Get Report

and

Oppenheimer

value Einstein at $15 a share.

The stock trades at a forward earnings multiple of 13, a book value multiple of 2.4 and a cash flow multiple of 4.5, 52%, 60% and 62% discounts to restaurant industry averages. These metrics suggest a margin of safety for buy-and-hold investors.

-- Reported by Jake Lynch in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.