GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Nathan’s Famous: Hot Diggity Dog

July 16, 2007 | About:
insider

Joe Citarrella

0 followers
I checked out the small (but famous) hot dog maker, Nathan’s (NATH), a few weeks back and liked what I saw going into the company’s annual hot dog eating contest. Yes, the shares have spiked following earnings and on some excitement leading up to the contest, but I still think the shares represent a compelling long-term investment.

For starters, as largely a franchiser (the company only operates a few stores itself), Nathan’s has been generating lots of cash for years and has low capital expenditure requirements. Back a few weeks ago, at some 12x cash flow (it’s now around 15x) it was available at a great price. Revenue has been compounding at a steady albeit low clip of around 7%, but operating margins have improved from 13% to over 18% since 2003. Debt is nonexistent, and returns on average equity using cash flow rather than earnings have been a respectable 15-20% in recent years.

That’s all great, but here’s what I really like. First, the company has plenty of room to grow. With operations in only 22 states and a tiny footprint in just 10 other countries, there’s tons of room for opportunity. That in itself is not enough to justify excitement, but what’s great about franchises with simple businesses, particularly food and retail chains, is that they generally can duplicate success to achieve growth and advantages of scale simply by copying itself in a different geographic location. Though cultural differences surely play some role in an region’s tastes for fast food, it’s unlikely, at least in America, that a great hot dog in the Northeast wouldn’t be enjoyed by folks in the Southwest. Branching abroad may be a bit harder in countries that don’t know the brand or don’t exactly enjoy hot dogs, but I give kudos to management for setting their sites internationally for growth.

The company also enjoys a unique niche in the fast food industry and can really leverage its growing popularity thanks to the Coney Island hot dog eating contest and other generally successful marketing strategies. Despite how unsexy or commonplace a hot dog may seem, I can’t seem to think of a storefront-based company with a bigger presence or more popular brand name associated with hot dogs. Companies like this often benefit from compounding popularity and success. Just like Subway, Starbucks, etc., Nathan’s should be able to enjoy growth from a feedback loop where popularity drives growth, which drives more popularity and recognizability, which drives further growth, and so on.

Of course, I’m not claiming Nathan’s is “The Next Starbucks,” but with no coverage, a tiny market cap, plenty of room for upside, and the potential for compounding success, I like it as a long-term play. I also think it’s only slightly above the low side of my pretty conservative valuation, which places the fair value of the shares at anywhere between $16 and $32 depending on growth rate assumptions. I think a “best case” valuation could place the shares as high as $42. Regardless, great business + strong growth potential + fair price = solid returns over time

About the author:

Joe Citarrella
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.3/5 (8 votes)

Comments

DaveinHackensack
DaveinHackensack - 7 years ago
NATH was a Magic Formula stock earlier this year. I don't own it though.
kfh227
Kfh227 premium member - 7 years ago
I think it's a matter of looking at what its growth rate will be going forward.

Wow, no debt and $5 in cash/share. OK, that PE is not 20, more like 15 or so.

Interesting idea from the buy and sit for 20 years. The thing is, if hot dogs ever become a "craze", NATH will surely benefit. The downside. McDonalds will quickly take their business away.
DaveinHackensack
DaveinHackensack - 7 years ago
KFH,

Peter Lynch wrote in "Beating the Street" that he liked fast food restaurant chains because if one started out in a few states and was successful, chances were, it would succeed nationally because American tastes aren't so different regionally. So you could buy the stock when the chain had 100 restaurants in the Southwest and ride it up as it expanded nationally. The casual chain restaurant market is so much more saturated today than back then though. Also, Nathan's doesn't have a new angle like Chipotle did (gourmet Mexican fast food), though even now Chipotle has two well-financed competitors (Baja Fresh and Qdoba).
fk
Fk - 6 years ago
kbodawala has a nice analysis of nathans in this thread:

http://www.gurufocus.com/forum/read.php?5,26269
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
This is just another example of why VALUATION is the most important consideration in deciding if a stock is a buy, sell or hold.

When Nathan's was written up here last July 16th it was at $20 with $0.66 in trailing earnings- a 30.3x P/E. That was the highest P/E [read:WORST for investors] in NATH's history based on all its past trading. It's no surprise that the shares tanked since then. Another case of investor excitement AFTER a big run up.

Today at $12.96 on $0.82 trailing earnings its P/E is a much more appealing 15.8x.

Nathan's earnings increased from 66 cents to 82 cents [ + 24.2% ] since last July but from an obviously overpriced 30.3 times earnings, the shares predictably went way down.

The 'story' didn't change but the valuation sure did. It is now about normal for Nathan's based on its own past trading history. Once again, regression to the mean took place.

Every stock has a high and a low each year [often at very diverse prices] and the business models rarely change much intra-year.

Since the 'story' is a relative constant it should be ignored once you decide you think it's a good one. Your decision to buy or sell then becomes easier. Only buy when the shares are available well below normalized value parameters based on the same share's past history.

********************************************************************************

Nathan's management have pledged to 'work their buns off' for shareholders.

They say it's a job they relish.
DaveinHackensack
DaveinHackensack - 6 years ago
Stockdoxc,

Thanks for that critical re-assessment of the NATH write-up from last year. When can we expect a similar re-assessment of your SLM write-up from last fall (which somehow got deleted, but was re-posted by Mattray here)?

Since you haven't responded yet to my last post on your original SLM thread, I'll ask you the questions here. When you wrote your original write-up of Sallie Mae , were you aware of the reduction in the federal subsidy for student loans that had been signed into law two months earlier? If you were aware of it, why didn't you mention it in your write-up of SLM?

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
I was aware of the changes at the time. SLM officers said at that time is would only impact earnings by 5 - 8%. That's why they felt sure the buyout had no 'material adverse change' escape for J.C. Flowers and their partners.

I [foolishly] trusted the company's multiple statements of their views of their forward earnings despite the change.

The private equity group offered to complete their original $60 buyout for $50 plus warrants estimated to be worth $2 - $6 per share. When SLM turned that down flat and threatened a lawsuit it was clear only idiots would do that if the business was really seriously deteriorating.

It turned out that SLM management were idiots and they cost me and others a lot of money.

I made my decision back then based on all currently available information. Much of that information turned out to be erroneous but that was not discernable at that time. I got suckered and it cost me.

That's why I keep well diversified. No one position will ever sink my whole portfolio. I still hold some SLM shares but not nearly as many as previously.

SLM has big potential from here but it is hard to predict what this stock will do at this time.

********************************************************

None of this has any relevence to my theory on valuation being the single most important factor in stock selection.

That theory has been time-tested over 30 years and I've found it to be as good an indicator of future stock performance as anything else I ever seen, read about or heard others discuss.

DaveinHackensack
DaveinHackensack - 6 years ago
Stockdoxc,

Thank you for that response and explanation.

"That's why I keep well diversified. No one position will ever sink my whole portfolio."

How many stock positions do you hold at any one time? Are your positions roughly equally-weighted?

"SLM has big potential from here but it is hard to predict what this stock will do at this time."

Is your sense that SLM's potential from here hinges on a change in government policy (e.g., an increase in the reduced subsidy for lenders)?

"None of this has any relevence to my theory on valuation being the single most important factor in stock selection."

Any macro factor that can materially effect forward earnings is at least as important as a valuation made on trailing numbers.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Many of the best gains are made by buying 'cheap' stocks when the macro environment looks shitty.

If you wait for a positive macro you can't get in at the really low prices anymore in most cases. Short-term traders should wait to have the wind at their backs. Long-term investors should [in my view] ignore the economy and buy on a bottoms-up basis.

Both ways can work but I much prefer bottoms up to top down strategy.
dmangan
Dmangan - 6 years ago
Nathan's is unheard of here in California. That leaves room for expansion, or else the brand isn't nearly as powerful as some think. Take your pick. But to my ears, the name has no magic, and given the trends in food these days, a hot dog seller may have a hard time.
kbodawala
Kbodawala - 6 years ago
Dmangan,

Nathan's is unheard of here in California. That leaves room for expansion, or else the brand isn't nearly as powerful as some think. Take your pick. But to my ears, the name has no magic, and given the trends in food these days, a hot dog seller may have a hard time.

In response to your comment I will rebute by saying See's candy is virturally unheard of in the NorthEast but it didn't stop Buffet from buying it. They still have a small presence here. But what Buffet liked was the connection people had with the product. I am from Brooklyn and I know that Coney Island and Nathan's are synonomus. Coney Island has fallen on hard times as of late but one constant still remains, when people go down there they help themself to a Nathan's hot dog. This in itself is not a good enough reason to buy the company. But regional powerhouses become national ones if executed correctly, if not they just become another so-so business on the national stage. Case in point Wal-Mart went from being a regional powerhouses to a global one. Coor's on the other had was a Rocky Mountain sucess story that never traslated into anything more. My answer to you is this, growth is not the reason to buy this company, the reason is that it produces cash galore with minimum capital expenditures, in the hands of a great capital allocator it can be used to purchase other companies with growth potential. After all See's candies and Blue Chip stamps were great Buffet investments not because the businesses were wonderful but because Buffet was able to use the cash generated by these businesses to buy other businesses. This is the same thing as buying an insurance company and using its float to buy other companies.

Inconclusion great capital allocators understand that a business even if it has no organic growth can be an essential part of growing a portfolio because their steady cash flows provide them leverage to invest in other faster growing businesses.
kfh227
Kfh227 premium member - 6 years ago
Maybe a good exercise is to look at what was discussed a year ago here on gurufocus?
DaveinHackensack
DaveinHackensack - 6 years ago
"Maybe a good exercise is to look at what was discussed a year ago here on gurufocus?"

Here's what I wrote then:

Peter Lynch wrote in "Beating the Street" that he liked fast food restaurant chains because if one started out in a few states and was successful, chances were, it would succeed nationally because American tastes aren't so different regionally. So you could buy the stock when the chain had 100 restaurants in the Southwest and ride it up as it expanded nationally. The casual chain restaurant market is so much more saturated today than back then though. Also, Nathan's doesn't have a new angle like Chipotle did (gourmet Mexican fast food), though even now Chipotle has two well-financed competitors (Baja Fresh and Qdoba).
fk
Fk - 6 years ago
slight digression on Sees, since it was mentioned:

Does anyone know roughly what % of Sees sales is for personal consumption vs. gifts?

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide