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Word of warning: When you ask a deep-value investor for his "best" idea for the coming year, be prepared to cringe. You'll likely be given a name that may not be all that familiar to you; it also is likely to have its share of fleas. This name not only is ugly, but it has been severely battered and its shares are down 42% year to date. In addition, it's one of the worst performers in a sector that itself is facing challenges.
Ruby Tuesday (RT) is a casual dining restaurant chain that has been lost in the abyss of one of the more competitive industries. I've written about it several times this year and had success even though it's the fourth worst-performing restaurant stock in 2016 and is almost routinely hated by investors. That's with good reason; this chain just can't seem to do anything right, and most investors have written it off.
I haven't -- not yet, anyway -- and still believe that it has been beaten beyond what it deserves. With some level of positive news, shares could double this year.
To show how low expectations are for RT, it currently trades for 0.19x sales, the second lowest of any publicly traded restaurant chain. For perspective, Wingstop (WING) - Get Report , Popeyes (PLKI) and McDonald's (MCD) - Get Report , at the top of the heap in this respect, trade at 10.6x, 4.9x and 4.2x sales, respectively. Near the bottom, Noodles NDLS, itself distressed, trades for 0.28x sales. If RT traded at the same level, its shares would be about 50% higher -- though it's a big "if," I realize.
Restaurant bankruptcies are not an uncommon fate; Cosi's (COSIQ) was years in the making and not a surprise. It appears as though the markets may be expecting the same for RT.
I'd suggest that sentiment has been overplayed. The company was indeed on death's door back in 2009, saddled with $600 million in debt along with some of the same image problems it has today. If there's one thing the company did right in emerging from those dark days, it was in paying down the debt to the current $224 million. What's more, most of that debt does not mature until 2020. In addition, the company has $68.7 million, or $1.15 per share, in cash on the books.
Furthermore, RT remains asset-rich and currently trades at just 0.55x tangible book value per share. That's not always a meaningful metric depending on what assets the company owns, but in RT's case, there's a lot of real estate. As of the end of last quarter, it owned the land and buildings for about 300 locations. About 10% of those were closed -- the result of the company's "Asset Rationalization Plan." Indeed, there was a net reduction of 109 locations this year as the company sought to close underperforming restaurants. That was a step in the right direction.
The thing that makes this story murkier, and perhaps more intriguing, is that there no longer is any analyst coverage on RT. We really don't know what to expect for coming quarters. We really don't know whether restaurant closings have helped same-store sales, or whether the latest menu promotions and changes, including the $12.99 three-course dinner, have met with any success. To be honest, given the company's multiple failed attempts to put customers back in the seats over the years, I'm skeptical.
However, I still believe that the company is worth significantly more that the three bucks and change it currently fetches. At the end of the day, deep-value investing is not about buying good-looking companies, but rather companies that are cheap relative to their current price, no matter how ugly they appear. There's bang for the buck given RT's enterprise value of just $337 million.
At the time of publication, Heller was long RT, although positions may change at any time.