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Red Robin Is a Buy

- By Jonathan Poland

Red Robin Gourmet Burgers (RRGB) has been unfairly punished by the market for more than a year now. In fact, in July 2015 the stock surpassed $91 a share and has since lost more than 68% of its value. Yet, aside from the company's 2018 slip, its underlying value is still much higher than the current share price represents.

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The company has 573 full-service restaurants, 85% company owned and operated and 17% located in shopping malls. It has been slow in shifting to home delivery as its customers have done so more rapidly than Red Robin anticipated. This was music to the ears of sellers with over 33% of the float sold short. For the fourth quarter, total revenues were off 10% year-over-year, and the company reported GAAP loss of 82 cents per share on revenue of $306.8 million. The bad news was that sales declined on the whole by 4.5%. The good news was that off-premise sales increased 23%, showing that Red Robin's food itself is not the issue. People will still eat.

As Red Robin works toward new openings and better convenience options, the company is looking for return to profitability. Despite the drop in the fourth quarter, people are still eating in the restaurant. The company generated $1.33 billion in total revenue for the year and currently has total equity slightly greater than its market value. It's priced at 0.3x sales and just 3x operating cash flow. Aside from the short-term loss, the underlying fundamentals are still solid.

The company plans to double up its franchise mix to 30% from its current level of 16%. Its current effort is centered on markets that have 100 or more existing Red Robin locations and that represent significant development opportunity for a potential partner. This is a risk since it will give up some of the profits to possibly generate faster growth. Thus, 2019 may be bumpy; however, for investors who can handle it, the long term will likely reward the investment.

The restaurant business is tough, but at scale it becomes a lot easier to survive. It's also a business where prices can rise with inflation without sacrificing quality. So, if Red Robin can start growing again, the market will likely put the average price multiple on its stock, which at 2.9x sales and 12.8x cash flow Red Robin's price growth could front run its actual performance in the years to come. In fact, Valueline believes that once management announces a new, viable store-opening policy, the shares could make up lost ground quickly. I agree.

Disclosure: I am not long or short Red Robin.

This article first appeared on GuruFocus.