Did We All Miss the Bottom in Restaurant Stocks?

Did We All Miss the Bottom in Restaurant Stocks?

Everyone else might be fretting about the dark clouds that hang over the restaurant industry because of the recession, but Landry’s Restaurants boss Tilman Fertitta sees blue skies ahead. His latest move: buying nine percent of seafood segment rival McCormick & Schmick’s at bargain-basement prices. He’s now McCormick & Schmick’s biggest shareholder, owning nine times more stock than company chairman and co-founder Doug Schmick. We’re glad to see the ever-active Fertitta stirring things up again. Does his action signal that the slowdown in the restaurant business might be coming to an end?

Why is this a big deal? The restaurant world would be abuzz if, for example, Darden boss Clarence Otis put his personal millions into, say, Brinker stock. Or if Cheesecake Factory head David Overton opened his wallet and bought a big stake in P.F. Chang’s. But when Fertitta makes a move like this, few people notice, because he’s a guy who makes bold moves on a regular basis.

Fertitta has been worth watching ever since he got his start in the restaurant business with the first Landry’s back in 1980. He’s since grown that company from a single-unit seafood house in Katy, TX, to a multiconcept restaurant, casino and real estate development company with a national footprint. The company went public in 1993, when it had just 11 restaurants, and today takes in $1.3 billion in revenue each year. The restaurant side of the business alone numbers 300 restaurants spread over 28 different concepts.

When entrepreneurial companies go public, they often lose their original personality, adopting a cautious corporate mindset instead. Not Landry’s. Fertitta, who is the company’s chairman, president and c.e.o. and controls 51 percent of Landry’s stock, keeps making big bets, no matter what. He’s done everything from buying additional restaurant concepts (Rainforest Café, among many others) and hotels (he’s up to five in Texas) to digging deep to acquire the Golden Nugget casino operations in Las Vegas and Laughlin, NV. Many of his moves seem crazy; most seem to work out.

Some analysts think Fertitta has just been just lucky. If so, his luck ran out when Hurricane Ike slammed into the Texas coast last September. Houston-based Landry’s derives nearly 25 percent of its revenues from its extensive Galveston and Kemah, TX, operations, both of which were in the direct path of Ike, But Landry’s kept rolling, as insurance proceeds enabled the company to report good numbers post-Ike.

So, with significant parts of his company coming back from a near-catastrophic natural disaster, with gambling revenues from his Las Vegas operations tapering off and with the casual dining market on a sharp downward trend due to the current recession, does Fertitta pull in his horns? Nope. Instead, he goes on the offensive and takes a big bite out of 94-store rival McCormick & Schmick’s. He did it using approximately $3.5 million of his personal funds.

Why? Fertitta’s not saying. But he knows the casual and high-end dining business like few others, and we can surmise that, to him, McCormick & Schmick’s (ticker symbol: MSSR) looked cheap. Among other metrics, MSSR’s market capitalization (roughly $25 million) was just slightly higher than its projected 2009 free cash flow ($22 million.) The company made money on a pro forma basis in 2008 and, as the people at Zacks Investment Research point out, “McCormick has enough availability on its revolving bank facility ($66 million) to (in theory) buy back all its common stock.”

So the numbers screamed “buy.” Anecdotally, McCormick & Schmick’s also has a reputation as a desirable place to eat and is a much-honored competitor in its self-defined “affordable upscale dining” segment.

Word of Fertitta’s move came in an SEC filing on March 12. It revealed that he had purchased 1,326,033 shares of MSSR for an aggregate price of $3,404,928.

But he didn’t buy them all at once. Fertitta began by purchasing 1,505 shares for $3.11 on Jan. 15, 2009, then 106,600 shares for $3.10 on Jan. 16, then 100,000 for $3.06 a week later, and 2,500 the next day at $3.10. He must have liked how those trade worked out, because Fertitta stepped up to the plate and bought a whopping 700,000 shares on March 5, at a mere $1.75 apiece, nearly half the price he had paid six weeks earlier, following that up with a 25,000 share block at $1.80 the next day.

Few others wanted to buy into McCormick’s & Schmick’s during this period. The average share volume per day for MSSR: 108,500. Fertitta was able to buy a huge amount of stock without moving the market.

What had occurred that made McCormick and Schmick’s worth so little, so fast? Other than the overwhelming sense of pessimism that overtook both the financial markets and the restaurant world during this period, we can’t see much.

By the time he was done, Fertitta owned nine percent of MSSR’s common stock. If he’s just going to be a passive investor, he’s already made a bundle. MSSR’s stock was trading just slightly over $4 a share as this newsletter went to press. That means Fertitta has already more than doubled his money on that big 700,000 share block and is ahead nearly $2 million on his aggregate purchase of MSSR stock. Not a bad return for a short-term investment.

It’s good news for him, and maybe for the rest of the industry. More than any outside analyst, Fertitta knows what restaurant chains are worth, particularly in the seafood segment. We’re guessing that he watched his own stock’s price tumble and, being intimately aware of what the performance numbers were in his own shop, came to the conclusion that Landry’s stock was way, way underpriced. And if Landry’s stock was cheap, so was the stock of McCormick & Schmick’s. He jumped on the opportunity, and we’re just glad that someone who knows the restaurant business sees owning more of it as a positive right now.

Should you follow his lead? We don’t know how Landry’s and McCormick & Schmick’s will fare from here. But many of Fertitta’s previous moves have worked out well for those investors who came along for the ride. We think this one’s got a shot, too.