Lance912 (90.02)

Diversification, Shmiversification. I'm All-In On Luby's (LUB)

July 07, 2008 – Comments (3) | RELATED TICKERS: LUB

Given I'm playing in the World Series of Poker right now, it seems only fitting that I use as many poker analogies as possible. So, let's start off with that I'm investing the bulk of my bankroll into Luby's, LUB. Not exactly a small amount; I own over 100k shares at this point.

 Luby's isn't a sexy stock. It's a regional cafeteria chain...heck, using regional is a stretch. The vast bulk of its stores are in Texas, and most are in the greater Houston area.

 The stock's chart aint pretty. It's been on a nosedive since March, going from around 10 to the low 6's right now. Revenues are rising, but Luby's has dealt with increased costs which has hurt its margins and profits.

 Now here's the catch. Luby's is managed by the most successful restauranters in Texas history, the Pappas brothers. Some might view the decrease in earnings as an omen, but the subsequent market over-reaction has produced a phenomenol buying point. A few reasons I've gone ALL-IN:

 1. Luby's is likely trading below its LIQUIDIATION value. Yes, it's trading below its book value, but its book value doesn't reflect its hard asset value. Its land is listed at cost. Most of Luby's land was acquired over 10 years ago, some 20-30 years ago. Its market cap prices its average store (that it fully owns, both building and land) at about $1.4 million. I'm no real estate expert , so the best way to explain it is that a Luby's is abougt the size of two-three stand-alone Chili's.

 2. Pay attention to its revenues, not its profits. The market is beating this stock to a pulp because it made $500k on $78 million revenue for a quarter instead of  something like $1.2 million on $77 million. At what point do we say "big deal" and look to the bigger picture?

 3. Strong growth plan. Its moving towards restaurants that sell more high-margin products and higher revenue/profits per store. Their new stores are a little more modern-looking and appeal more to sububanites. They also are making some headway in culinary contracts at hospitals. Since most of you don't know Luby's food, let's just say it's a huge hit among the geriatric crowd, so deals like these will likely pop up more and more in the future.

 4. Management (i.e. Pappas brothers) are buying like crazy. They've bought stocks in 5 trading sessions over the past 2 weeks. Who am I goign to side with? Some random idiot panic selling or the most successful restauranters in Texas that know the business inside-and-out? I think the choice is clear. Some speculate the Pappas might buy out the whole company at some point. That doesn't seem to be the case. Right now, they are able to accumulate a fair amount of the company bit by bit at a dirt cheap price, so there's little reason they would even need to make a tender offer.