Description

lone star steakhouse owns and operates over 243 mid-priced casual dining restaurants. Its "Texas-style" menu can be found under three different restaurants chains throughout the United States, as well as 26 restaurants in Australia And Canada. Lone Star Steakhouse and Saloon provides a roadhouse atmosphere,Del Friscos Double Eagle Steakhouse caters to a more high-end business clientele, and Sullivans Steakhouse provides entertainment with jazz and swing music provided regularly. The present stock market volatility and economic uncertainty leaves many investors wondering whether consumer driven sectors will perform despite a faltering economy.However, I believe that fundamental anaysis is key, particularly now. Sticking to companies with strong balnce sheets and strong operations will provide investors with added protection during uncertain times.With this in mind, I believe that lone star steakhouse is a fundamentally undervalued company with a number of significant features.Lone star presently trades at $12.96 and has a dividend yield of 3.86%.only five years ago the the stock was trading at $40. A tough 1996 left the stock tading btewwn $8 and $12 for the past two and a half years. At present Lone Star trdes below it tangible book value of $16.81 which is greatly below the industry average of 3.85 times book value. Lone Star rovides excellent cash flow and is debt free.Its favourable financial position includes $39.5 million in cash ($1.64 per share) which allow Lone Star to continue its @0.5 dividend per share.and a sgnificant stock repurchase program.Its outstanding shares have descended from 24 million in 1997, to 24 million today.Incidentally, management owns 23% of the company stock with the CEO Jamie Coulter owning 2.4 million shares or 10% of the outstanding stock.With the stock buyback continuing this " creeping privatization" increases management's interest,control, and motivation.

Catalyst

I do not feel that Lone Star's low valuation is warranted.I fell management is on the right track. The first quarter of 2001 has been a reflection of this. Net income was up 16% over the comparable quarter and same srore sales were up in all three of its chains.Management has realized that slow and steady wins the race and has moderated expansion plans. The company has also reevaluated its geographic stance resulting in the closure and sale of anumber of non-profitable locations.It is also worth noting that as of March 2001 the company owns 65% of its locations which might provide added value to Lone Sar in the event of a sale.