Thursday, January 31, 2013

Is This MicroCap a Good Investment After CEO's Buy?

I often pay attention to insider trading, especially when the top executives of a particular company buy a significant amount of stock. That is quite an important signal of value, and the indicator of a potential price surge in the near future. I will cover two companies that have experienced more than $300,000 worth of insider buying since the middle of December in two articles. In this article, I'll focus on a micro cap restaurant chain, Luby’s (NYSE: LUB), with two brothers purchasing 100,000 shares just a week ago. Should investors follow their lead and invest in the company as well? Let’s find out.
Same Store Consistent Growth
Luby’s has been operating in the restaurant industry for more than half a century through several brands, including Luby’s Cafeteria, Luby’s Culinary Contract Services, Bob Lucy’s Seafood, and Fuddruckers. The company is currently operating 156 restaurants in the US, with the majority of restaurants in the Houston metro area in Texas, including 121 Fuddruckers franchise restaurants owned by 53 franchisees. Like many other restaurant operators, the main revenue source has been restaurant sales, which came to $324.5 million, accounting for 92.7% of the total revenue. In fiscal 2012, the restaurant operator reported to have a 2.6% same-store sales growth, and same-store sales have increased continuously for the last 4 quarters of fiscal 2012. Luby’s uses little debt for its operation. As of November 2011, it had $173 million in total stockholders’ equity, $2 million in cash, and only $11.5 million in long-term debt.
Decent Q1 2013 Operating Performance
On Dec. 19, Luby’s reported decent first quarter results for FY2013. The restaurant sales were $74 million, 1.1% higher than the same quarter of last year. The growth in sales was due to both the growth in same store sales, as well as the opening of 7 new restaurants since last year. Out of the 1.1% total restaurant sales, the high growth came from Fuddruckers and Koo Koo Roo’s sales growth of 1.9%, whereas Luby’s restaurants increased its sales by 0.8%. However, store profit levels declined slightly to $9.8 million, lower than the profit in Q1 2012 ($10.1 million), due to higher labor cost and higher advertising and marketing expenses. In December, Luby's announced it will pay $11 million to purchase 23 restaurants from the Cheeseburger in Paradise chain. 
Significant Insider Buys and Lowest Leverage
On Dec. 26, right after Christmas, Luby's President and CEO Christopher Pappas bought 50,000 shares of Luby’s at the cost of $6.565 per share, with the total transaction worth nearly $330,000. Harris Pappas, Christopher’s brother,  bought the same amount of shares at the same price on the same day. Collectively, those two brothers owned around 32.89% of the total company. This is indeed a very good value signal for shareholders.
At the current share price, the restaurant chain is trading at 7.19x EV/EBITDA. The valuation is a little cheaper than its peer, Denny’s Corporation (NASDAQ: DENN), which had its EV/EBITDA at around 7.7x. Denny’s EPS for the last 12 months of $0.11 was five times higher than that of Luby’s, at $0.02 per share. However, looking deeper into Denny’s balance sheet, this was due to the provision for income tax, which pushed Denny’s net income much higher. Its other peers, Einstein Noah Restaurant (NASDAQ: BAGL), seems to be the cheapest, with only 6.51x EV/EBITDA. However, Luby’s has the most conservative capital structure. Luby’s D/E is only 0.1x, whereas Denny’s D/E is as high as 324.1x, and Einstein Noah’s D/E is 0.6x.
My Foolish Take
The high level of insider ownership is a strong indicator of value. Luby’s is improving its operating performance with a conservative capital structure, which makes investors feel safe. In addition, it is quite reasonably valued. I personally think Luby’s could experience a price surge in the near future. In the next article, I will dig deeper into another stock with a recent CEO buy of over $300,000 in company stock.

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