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Good buy, Ruby Tuesday

Who could hang a price on you?

When it trades at 18 someday

I’ll be glad I didn’t miss you

Ruby Tuesday doesn’t produce oil.  They don’t produce fertilizer.  Those are “new economy” industries.  This is an “old economy” restaurant company in the eye of a perfect storm.  I’m sure I don’t need to explain to value investors what is hitting restaurant companies.  Its just awful right now.

What makes RT so interesting is that they just finished a remodel of all of their restaurants and are about to play the game for maximum free cash flow, and it looks like conservatively going forward we have a 15% free cash flow yield to equity at the current price for what has historically been a decent company which is still making a small profit in a horrendous environment.   

The man who founded this company 30 years ago still runs it.  I’ve met him, he’s good, but he made a colossal capital allocation error by levering up his balance sheet to buy back stock at a “fair” price a year before the stock got stupid cheap.  That was not like him, and he learned his lesson and now is going into maximum free cash flow mode which starts right about now.

Market cap is less than $400 million.  Lets look at a scenario where Ruby Tuesday earns zero forward 12 months, which is well below what is expected for this year (but that’s about what I’m expecting after seeing that they made their number in their latest quarter on the tax line).

Depreciation is about $85 million and management is talking about cap-ex going forward of $20 million.  Their bank won’t let them spend more than 30 million.  Call cap-ex 25 and earnings of zero and you’re looking at free cash flow of $60 million, a 15% free cash flow yield to equity at the current market cap of $400 million. 

Remember, they are just finishing a remodel of the whole chain so they are in a perfect position to not spend money for a while, and also remember this free cash flow number is at a time when business is TERRIBLE.

Look at the chart – the free fall from 30 to 6 was simply amazing to watch, fortunately from the sidelines.  This looked like a buy at 16 and at 10 and because we owned the last stock I posted on VIC very big, we wouldn’t buy another restaurant stock unless it got just stupid cheap.  We got involved when every insider and their dog bought stock around 6.  Look at the filings that marked that bottom.

Even after getting that entry price we waited to take the position size higher until we got some resolution about their negotiation with their lenders.  Their interest rate is going to go up, and the dividend is likely to be eliminated (don’t buy this for the yield – and if you like it and want to be clever wait until the announcement comes in the next month that the dividend is eliminates – we’re holding a few shares back until that comes, but anybody who is paying attention should be expecting that announcement.)  But the lenders didn’t pull the plug on them.

Why the lenders didn’t pull the plug on them is the big reason we were comfortable owning the stock.  Despite the high level of debt, they have a balance sheet.  They own real estate.  Land and buildings at historic cost on the balance sheet of more than $600 million.  We’re not going to argue that the real estate is worth more than the enterprise value, but it sure helps us get comfortable with the $600 million or so of debt.  And like I said at the beginning they are about to go into maximum free cash flow mode to pay down debt.

Don't question why it needs

To trade for free

I'll tell you it it is temp-orarily

Falling all the time.

Stock breaks five and I will lose my mind

A price unkind 

Good buy, Ruby Tuesday. 

Who could hang a price on you?

When it trades at 18 someday

I'll be glad I didn't miss you.

Forgive the poetry.  Major Rolling Stones fan.

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