Description

Furr’s Restaurant Group operates 96 cafeteria-style restaurants primarily located in the Southwest and Midwest. In 1996, the company underwent a troubled debt restructuring that understandably caused the share price to plummet. In my judgment, Furr’s is well on the road to recovery, and their credit risks have been greatly diminished, making the company a worthwhile value investment.


What’s to like about Furr’s?

 Reduced Capital Expenditures = More Future FCF: Trailing five-year FCF has averaged $4.62 million per year, or $0.47 per share. However, capital expenditures during the past three years have included expenses for renovations and the opening or relocation of five restaurants. According to management, core capital expenditures are $3.2 million per year, whereas operating cash flow has averaged $15.8 million the past five years; therefore, no-growth FCF would be approximately $12.6 million, or $1.29 per share, if we assume forward operating cash flow is similar to the past five years. This may be conservative, as recent cash flows have been higher than 4 and 5 years ago, and the renovations and new restaurants should improve future cash flows.

 The Stock is Cheap: Price to trailing five-year free cash flow is 6.1. Price to no-growth FCF is 2.2. EV to trailing five-year free cash flow is 21.1; whereas EV to no-growth FCF is 7.7. EV in this case assigns no value to long term assets; this is almost certainly overly conservative.

 Reduced Debt Risk: In April of 2001, Furr’s refinanced its 12% debt, which was due at the end of 2001, to a rate slightly above 8%; the refinanced principal payments are due in $3 to $6-million chunks per year over the next several years (see table below). As a result of the refinancing at a reduced rate, Furr’s will report a pre-tax gain of $3.5 million in the second quarter of 2001. They also opened a revolving credit agreement for up to $20 million, of which $9 million has been borrowed thus far, leaving them with up to $11 million of additional leverage, if need be; this agreement is good until 2006. In addition, over the past five years Furr’s has been able to pay down its long term debt from $69.1 million to $48.2 million, while paying for major renovations and opening several new restaurants.

2001 3,000
2002 5,100
2003 5,100
2004 5,600
2005 6,600

 Net Operating Loss Carryforwards Will Reduce Future Taxes: Furr’s currently has $118.6 million of net operating loss carryforwards which can be used to offset future income tax liabilities.

 Loyal Customers: Most customers at Furr’s are over 45 years old, an age group that has more routine eating habits compared to younger people. Also, the spending habits of older customers tend to be less influenced by the economy. A negative aspect of this customer base is that, obviously older people have a lower life expectancy.

 Furr’s Owns a Wholesale Food Distributor: This distributor supplies 85% of the food and supply requirements of Furr’s, providing uniformity and the ability to save money through volume purchases. In addition, management believes there are opportunities to increase capacity at the distributor and sell more to third parties – a potential source of additional revenue.

 Insider Purchases: Within the past 8 months there have been 7 purchases of 1000 or more shares by three separate insiders vs. one sale.


What’s to not like about Furr’s?

 Recent CEO Resignation: The June 21, 2001 press release indicated that Phil Ratner, Furr’s CEO, would be taking another position within the restaurant industry. Since he took over in 1998, the company has performed well with him at the helm, so this is obviously a concern.

 Future Pension Plan Costs: Due to settlement of pension plan litigation, Furr’s projects it will owe $2.2 million in 2001, $850 thousand in 2002, and less in subsequent years to its pension plan. They should be able to handle this, but it is an added concern, especially if their projections are too conservative.

 Still Have Sizeable Amount of Debt: If the economy takes a serious dive in the near future, it is possible that Furr’s may not be able to continue to meet its debt obligations. This isn’t likely, but always a concern with a company that has a large amount of debt.

 No Dividends in the Near Future: According to their new credit agreement, Furr’s must maintain certain levels of EBITDA, operating cash flow, and limits on capital expenditures. Because of their indebtedness, management does not anticipate paying a dividend in the forseeable future.

 Illiquid Stock: It is not uncommon for no shares of Furr’s to trade on a given day. Because of this illiquidity, the spread isn’t very favorable.

Catalyst

Catalyst: Furr’s recently restructured its debt at a much lower rate with longer maturities, greatly reducing the risks that they will be unable to meet their obligations.