Mario Cibelli (Trades, Portfolio), founder and portfolio manager of New York-based Marathon Partners Equity Management, disclosed he upped his position in J. Alexander’s Holdings Inc. (JAX, Financial) by 21.88% on April 10.
Known for focusing on less efficient portions of the market, the activist investor’s firm relies on fundamental research to find long-term opportunities among undervalued stocks.
According to GuruFocus Real-Time Picks, a Premium feature, Cibelli invested in 175,000 shares of J. Alexander’s for an average price of $11.29 per share. He now holds 975,000 shares, which represent roughly 4% of the equity portfolio.
GuruFocus estimates he has gained 9.7% on the investment since the third quarter of 2015.
Activist buyout offer
Earlier this week, the Nashville, Tennessee-based company, which operates several chains of upper-scale restaurants, received a $186 million buyout offer from activist investment firm Ancora Advisors, who owns nearly 9% of its outstanding shares. The per-share price of $11.75 is a 24% premium to J. Alexander’s closing price on March 12, which, according to CNBC columnist Thomas Franck, is when Ancora disclosed its stake in the company.
In a letter to J. Alexander’s board, Ohio-based Ancora addressed its grievances regarding the restaurant operator’s performance.
On top of a “lack of scale and limited liquidity,” the firm said the company’s problems stem from a consulting agreement with Black Knight Advisory Services following its spinoff from Fidelity National Financial Inc. (FNF, Financial) in 2015. According to the terms of the deal, the company paid an annual fee of 3% of its adjusted pretax earnings in exchange for “'corporate and strategic’ advisory services.” The problem with this is William P. Foley, the chairman of Fidelity, is also a principal member of the advisory group.
According to Ancora CEO Frederick DiSanto, the arrangement “allowed [Fidelity] and management to continue to skim off more value for themselves at the expense of shareholders.”
Including a $4.56 million payment at the end of the accord, Black Knight made more than $7 million from J. Alexander’s.
The firm also criticized J. Alexander’s attempt to merge with Ninety Nine Restaurants, a casual dining chain owned by a subsidiary of Fidelity National, in August 2017. Ancora described the proposed deal as “riddled with conflicts of interest” as members of J. Alexander’s board were involved on both sides of the transaction.
According to CNBC, the deal ultimately failed as a number of key shareholders, including Cibelli, opposed the proposed merger.
In a press release, J. Alexander’s Chief Financial Officer Mark Parkey said the company will review, evaluate and respond to the letter.
Valuation, performance and guru ownership
The restaurant operator, which also owns the Redlands Grill, Lyndhurst Grill, Overland Park Grill and Stoney River Steakhouse & Grill brands, has a $165.47 million market cap; its shares were trading around $11.25 on Thursday morning with a price-earnings ratio of 41.56, a price-book ratio of 1.46 and a price-sales ratio of 0.67.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.
On March 11, J. Alexander’s reported fourth-quarter and full-year 2018 financial results. The company posted earnings of 6 cents per share on $63.2 million in revenue for the quarter. For the year, earnings came in at 27 cents per share on $242.2 million in revenue.
Despite having poor interest coverage, J. Alexander’s financial strength was rated 7 out of 10 by GuruFocus. In addition, the Altman Z-Score of 3.12 indicates the company is in good fiscal health.
The company’s profitability and growth scored a 6 out of 10 rating. While the operating margin has declined over the last five years, the restaurant operator’s returns outperform at least half of its competitors. It is also supported by a moderate Piotroski F-Score of 5, which suggests business conditions are stable.
As of the end of fourth-quarter 2018, Cibelli had a 5.44% stake in the company. Other top guru shareholders who may benefit from the potential deal are Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Philippe Laffont (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).
Portfolio composition
Cibelli’s $213.31 million equity portfolio, which is composed of 18 stocks, is heavily invested in the consumer defensive sector with a portfolio weight of 40.91%.
As of the end of the fourth quarter, the guru’s top five largest holdings were U.S. Foods Holding Corp. (USFD, Financial), e.l.f. Beauty Inc. (ELF, Financial), HD Supply Holdings Inc. (HDS, Financial), PayPal Holdings Inc. (PYPL, Financial) and Facebook Inc. (FB, Financial).
Disclosure: No positions.
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