Ruth's Chris a Well-Done Way to Profit

NEW YORK ( TheStreet) -- My recent article on Ruth's Hospitality Group ( RUTH), which runs the popular chain Ruth's Chris Steak House, caused quite the stir.

I suppose it's because I decided to buy the stock after suggesting that the restaurant saved my marriage. I was accused of having committed a cardinal sin -- buying a stock on emotion. While (admittedly) a somewhat fair assessment, I think it is much more than that.

Indeed, the restaurant demonstrated to my wife and I what a first-class dining experience should feel like. But also, in its most recent earnings report, the company continues to show the value of a top-notch management team.

The Quarter That Was

For the second quarter that ended in June, the company reported net income of $5.8 million, or 17 cents per share, on revenue of $97.7 million, exceeding both its profits of $4.4 million and revenue of $92 million in the same quarter of a year ago. Excluding 2011 tax benefits for the second quarter, the company actually showed a 2012 second-quarter net income increase of 70% while second-quarter revenue climbed 6.2%

Founded in 1965, the company and its subsidiaries operate restaurants in the U.S. as well as internationally. Along with Ruth's Chris Steak Houses across the nation it owns Mitchell's Fish Market, Mitchell's Steakhouse and Cameron's Steak House. In all, it operates over 150 restaurants, company-owned as well as franchises.

In its report, its company-owned Ruth's Chris Steak House's comps increased 6% while its Mitchell's Fish Market comps increased 2.3%. The company said its operational expenses grew by 6.1%, or $5.1 million, compared to the second quarter of 2011.

On the flip side, it was able to decrease its restaurant operating expenses (as a percentage of revenue) by 60 basis points to 51.1%. It said this was attributable to increased sales leverage which helped offset higher premiums for health insurance.

The company also reported lower costs for marketing and advertising, which decreased by 90 basis points to 2.5% although its administrative expenses edged higher by just under $1 million to $6.2 million in the second quarter.

Clearly, this is a management team that understands what it needs to do to drive profitability and growth. Even more remarkable is that it continues to do this despite concerns of rising costs of beef, which continues to be one of the company's greatest challenges. Nonetheless, it is a challenge that it continues to overcome.

At the time it reported earnings company Chairman, President and Chief Executive Officer Michael P. O'Donnell said Ruth's Chris enters the second half "excited about our future growth prospects. With a healthier capital structure, we are better positioned for earnings leverage to drive improved profitability and creating more value for our shareholders."

It's becoming increasingly difficult not to see this company as the focus of an acquisition at some point, particularly when Morton's Steakhouse has been acquired for $116.6 million by Tilman J. Fertitta, the Texas billionaire and restaurateur. This came just a month after he acquired McCormick & Schmick's for approximately $131.6 million.

I can't imagine at this point a more desirable name than Ruth's. I think its market cap and brand makes it an attractive candidate. What's more, the fact its stock is trading at just 12 times forward earnings makes the valuation equally attractive, if not undervalued.

Additionally, on a cash flow and revenue basis it is clear that much of the company's future growth and income potential has not been priced in as earnings are set to show consistent growth.

Bottom Line

From an investment perspective the stock is a buy at this level, even though it has already increased this year by over 35%. The question is, what is the stock worth?

According to the three analysts that cover it, the stock has a median target of $8.50, or an additional premium of 27% above its most recent closing price and an additional premium of 34% based on its high target of $9 per share.

For anyone who appreciates not only a great steak but a great company with a potential for growth, it's hard to find a better name than Ruth's.

At the time of publication, the author was long RUTH shares.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.