Ruth’s Hospitality Group: ‘Steak’ Your Claim To A 13% Free Cash Flow Yield With Upside

Ruth’s Hospitality Group (RUTH), a $250 million market cap restaurant company, gives long-term investors the opportunity to potentially generate returns of over 13% a year, with additional upside due to its attractiveness to potential acquirers and modest growth prospects. While the company is certainly subject to the standard macro risks of any restaurant company, such as recession and high commodity costs, I believe the company’s ability to generate minimum sustainable free cash flows of $30-$35 million a year (12%-14% free cash flow yield), combined with a growing franchise income stream and the potential for incremental unit growth to boost free cash flow makes it a reasonable investment.

As a value investor, I am always interested in looking at a company that generates substantial amounts of free cash flow as a percentage of its market cap. On Wall Street there is a saying, “Earnings are an opinion, cash is a fact.” By focusing on sustainable free cash flow, an investor begins to think like an owner and not the typical transient trader who seems to dominate “investing” these days. A company’s sustainable free cash flow calculation has to incorporate numerous factors such as changes in working capital, cash taxes and capital spending.

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