The reason I have been watching the business is simple. It has always looked cheap. Today it still does. At the time of writing, the stock is trading at a price-book ratio of 0.7. It is not possible to analyze the group's earnings or cash flow multiples because it has not generated any positive cash flows or earnings for over five years. Nevertheless, if one were to look at the stock's book value alone, it appears cheap.
Being cheap is not the only reason I have been watching the company. Whenever I have dived into its figures and earnings conference calls, it always seems as if the company is on the verge of a breakthrough. Management is always optimistic that changes are happening, growth is coming through and consumers are returning. Yet, the turnaround has never arrived, and there are several valuable lessons here.
Deep value lessons
The biggest issue over the past couple of years is the company's lack of value creation. Saying that, it has not just not created value, the company has destroyed it.
Since 2015, shareholder equity has shrunk from $175 million to $74 million (as of year-end 2020). There is no point buying a stock at a discount to book value if book value continues shrinking. The valuation can improve, but shareholders will still have a poor return if the book value has fallen.
The other lesson I have learned from this scenario is the drawbacks of being an absent investor. I cannot claim to be an experienced restaurant investor. I cannot even really claim to have any experience with the foodservice industry at all. This held me back when analyzing Luby's prospects. It meant I was always overreliant on management analysis. I have no first-hand experience of the troubles and headwinds they were trying to deal with, and neither did I have any first-hand knowledge of the experiences they were providing to other consumers.
It is all very well for a company's management to say that they are bringing consumers back into restaurants - they are not going to say anything to the contrary. Investors very rarely receive a frank analysis of the business environment. More often than not, it is a positive picture painted by management to provide the best outlook. The figures are not designed to be misleading, but the picture is sometimes provided in the most optimistic light rather than a balanced projection.
However, there is a twist in this story. At the end of November, investors voted to dissolve and liquidate the business. The decision was backed by its major shareholders, including Christopher Pappas, who has been the President and CEO since March 2001 and controls 18.4% of total shares outstanding. Harris Pappas, who was the chief operating officer until 2011, controls 17.9% of the shares.
At the end of 2020, Luby's financial statements placed the book value per share of the enterprise at $2.40. According to the company's latest update on the liquidation process, it is expecting to realize $5 per share from liquidating assets this year. The asset sales have realized substantially more than the initial figures projected.
The last time the stock traded above $5 was 2013, so this is going to be a happy ending for long-suffering investors. In this age where massive amounts of debt are all too common, this is one of the rare instances where shareholders will actually get something from the liquidation.
For outsiders, it is a lesson in how difficult value investing can be. Luby's looked cheap for years and would have remained cheap had it not been for the liquidation event. And even the liquidation event has thrown up some surprises. It turns out the assets were worth more than double the balance sheet value.
This scenario shows just how important it is for investors to understand their target companies well, and when researching for deep value investing opportunities, concentrate on finding an event that will crystallize value.