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Selected financials (in millions USD):
| Financial year | 02 | 03 | 04 | 05 | 06 | 07 | 08 | 09 | 10 | 11 |
| Revenue | 833 | 914 | 1,041 | 1,110 | 1,306 | 1,410 | 1,360 | 1,249 | 1,195 | 1,265 |
| Cash flow from operations | 146 | 148 | 204 | 183 | 192 | 185 | 102 | 103 | 140 | 116 |
| Free cash flow | 35 | (6) | 53 | 21 | 20 | 59 | (15) | 85 | 123 | 90 |
| Total Capital employed | 520 | 805 | 919 | 1,075 | 1,172 | 1,230 | 1,272 | 1,124 | 1,064 | 1,064 |
| Equity | 334 | 415 | 527 | 563 | 527 | 439 | 432 | 416 | 538 | 592 |
| Debt | 8 | 207 | 168 | 247 | 376 | 513 | 588 | 476.6 | 276 | 329 |
| Share count | 64 | 64 | 66 | 65 | 61 | 57 | 52 | 51 | 62 | 64 |
Market Capitalization: approximately 490 million
Enterprise value = 490 (market cap) + 320 (debt) => 810 million
Free cash flow estimate by management for 2012 = 90-100 million
Initial free cash flow yield on enterprise value = 11.25% – 12.5%
Initial free cash flow yield on market cap = 19.75% - 20.25%
Catalyst:
- Cheap price is its own catalyst to start with. The market price of the equity is too low compared to the free cash flow generation.
- Ruby Tuesday owns about 50% of the real estate of the 750 locations. This can be verified by low rent they pay ($44 million per year). Majority investors (e.g. Carlson Capital) is pushing to sell some of the real estates and do lease back transactions. This will create a huge cash reserve for the company which it can use it for debt reduction and share buybacks.
Risks:
- Company is planning to use about $60-70 million on capital expenses including opening new concept restaurants which have unproven profitability.
- Asset sale/lease back real estate essentially increases the operating expenses of the company as it currently enjoys the rent-free status on 50% of the owned RE.
- Economic activity in the greater portion of the restaurant locations remains weak or dismal.
- Raw material cost increases due to sudden inflation may not be passed on to the customers immediately.
Final comment:
The company is trading for around five times free cash flow. Considering the risks involved with debt load and unproven new restaurant openings, the price we pay today is cheap enough to justify the risks.
Disclosure:
I own shares of this company.
About the author:
I am an investor searching and analyzing investments following value oriented principles.
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