Ruby Tuesday Estimates, Target Price Lowered at Credit Suisse to 9 from 10
With Thursday's (5th March) weakness, back to trading near real estate value: Although cost cuts got RT to a decent ex-gains EPS number, 3Q results clearly disappointed. Top-line was the issue, with a significant 2-year comp decline against a slightly improving industry trend. That said, after today's weakness, we see the value of RTs real estate again offering downside support (we estimate real estate value of ~$750mil vs a current EV of ~$770). Taking this and the option values discussed below into account, we remain comfortable with an Outperform rating.
RT fundamentals and Lime Fresh represent two options going forward: RT continues using cost cuts to fund massive investments in outside consultants, food quality, menu innovation, and marketing. Investors are well prepared for the costs, but essentially hold an option on any corresponding improvement in fundamentals. RT also announced it has purchased Lime Fresh (it previously franchised.) We believe investors currently ascribe minimal value with it, and hold an option on RT turning it into a meaningful growth story.
...Although options may take longer to fully play out: A completely turnaround in fundamentals or a Lime Fresh growth story don't happen over night; however, we believe expectations are low enough that even moderately positive data points could be a mild catalyst.
Estimate changes and valuation, price target falls to 9 (from $10): Following results, our F12 EPS est. falls to 0.45 from 0.61, F13 to 0.50 from 0.76, and F14 to 0.69 from 0.88. Our 9 (from 10) price target is based on a 14x multiple applied to our NTM, 12 mo. from now, EPS est. of 0.64.