On Friday, Nathan�s Famous (NATH) reported results for the 4th quarter and full year ending March 25, 2007. Newsday described the company�s results as follows: �Money poured into its coffers in its fiscal fourth quarter almost as quickly as hot dogs get swallowed at the company's annual Fourth of July eating contest.� Indeed, to put it more succinctly, I would have to say that this dog sure can hunt.
For the 4th quarter, total revenue from continuing operations increased 12% to 9.9M, net income from continuing operations increased 111% to 1.2M, and diluted EPS from continuing operations increased 111% to 0.19. For the full year, total revenue from continuing operations increased 11% to 45.7M, net income from continuing operations increased 34% to 5.2M, and diluted EPS from continuing operations increased 39% to 0.82.
The past four years have seen impressive growth in revenue, net income, and earnings per share.
Revenue from continuing operations:
2005: 34.2M (14% increase)
2006: 41.2M (20% increase)
2007: 45.7M (11% increase)
This translates to a compounded annual growth rate of 15%.
Net income from continuing operations:
2005: 2.8M (40% increase)
2006: 3.9M (39% increase)
2007: 5.2M (33% increase)
This translates to a compounded annual growth rate of 38%.
Diluted EPS from continuing operations:
2005: 0.46 (28% increase)
2006: 0.59 (28% increase)
2007: 0.82 (39% increase)
This translates to a compounded annual growth rate of 32%.
Considerations which might aid in valuing the company:
Share price: 15.79 (on Friday, the stock rose 5.3% on four times the average daily volume)
Market cap: 93.2M
Long term debt: 0
Enterprise value: 63.5M
Owner earnings (net income from continuing operations + D&A � capex): 6.1M
Return on equity: 14.5%
If we assume a 20% growth rate over the next five years, which is considerably lower than we have seen over the last four years, we compute a PEG of .95 and (EV/OE)/G = .5.
A DCF calculation with the following inputs:
1. Owner earnings: 6.1M
2. Growth rate in years 1-5: 20%
3. Growth rate after year 5: 3%
4. Discount rate: 11%
These numbers yield a fair value of 29.09. Thus, with the assumption of a 20% growth rate, the current price represents a 46% discount to the DCF value. Reverse engineering a DCF calculation shows that the current price reflects the assumption of a 3% growth rate for the next 5 years and 0% thereafter.
I hold a position in Nathan�s and have been following the company for about a year. It has a small float, is thinly traded, and there is no analyst coverage. Nathan�s is a fast-growing company with strong fundamentals that are overlooked by Wall Street as its current price fails to reflect the company�s future potential.
You have done a fine job of valuation based on the past. The future is a little cloudy. Restaurant sales are mature and there is virtually no expansion of restaurants. therefore the whole story is growth of branded products--that's hot dogs according to the 10-K. THat is unlikely to expand at anything like 15%. The stock was cheap but now there is significant risk as it has a 23 P/E on trailing earnings. It would be a more comfortable story if the restaurants were expanding but in fact they sold Miami subs and Kenny and Arthur are pretty tired concepts. Good pick at $10.
The share count figure of 6.341M which I used is the weighted average diluted share count reported on the most recent income statement. The basic (undiluted) share count reported on that statment is 5.836M. The share count of 6.474M you are using is very close to the diluted count I took off the income statment.
I think that the SeekingAlpha model has problems in that it is double counting certain items. The double counting comes in because you count the cash on the balance sheet as both an asset and an income item.
$30M on the balance sheet produces maybe $600K annually in income. Its value is $30M (or less), not, say, $39M which would be $600K at a 15x multiple.
To get a good model, you need to back income out by about $1M which is interest income plus the Miami Subs income. These are already in the balance sheet, if you include them in the income statement you are double counting them.
Your point about interest income is valid. I didn't back it out in the interest of simplicity and because it makes very little difference in terms of the overall conclusion that the stock is seriously undervalued.
In my calculation of owner earnings, I started with net income from continuing operations, added D&A, and subtracted total capex. The company had 663K in interest income in 2007. If we back this out, we arrive at owner earnings of 5.4M. This leads to a DCF value of 26.29. The current price represents a 40% discount to this DCF value, slightly less than the 46% discount computed previously. Reverse engineering the DCF calculation (using the revised owner earnings figure) shows that the current price reflects the assumption of a 6% growth rate for the next 5 years and 0% thereafter. This is a slightly higher growth assumption than the 3% computed previously, but either way we see that the current price reflects an assumption of negligible growth.
Thanks for your comment. I think this is a fascinating company to follow. It will become even more so if and when the company gains some analyst coverage.