Don’t Wait For The Clouds To Clear – Buy ATI Now

Date: May 1, 2013       Price: 26.02    Mkt. Cap.: 2.8 billion

We recommend purchase of the shares of Allegheny Technologies (ATI).  ATI deserves enormous credit for wisely reinvesting in its basic business despite fluctuating earnings.  Too many U.S. industrial companies have increased dividends, made mistimed stock buybacks, or completed silly acquisitions.  ATI is nearing the end of a long capital investment cycle that will leave it well positioned for future growth and sustained profitability. Highly cyclical companies like ATI are notoriously difficult to understand, value, and predict.  However, it has been our experience that investors with patience and courage can profit from owning the shares of volatile companies that are competently executing a solid long-term strategic plan.

We will give an overview of ATI’s business, make an attempt at valuation, and finally discuss some of the “timing” issues involved in our recommendation


ATI is a difficult company to understand.  It is in part a producer of many highly specialized steel alloys that have very interesting growth prospects, and above average profitability profiles.  These products include titanium alloys that have increasing importance in the manufacturing of commercial jet airframes and jet engines.  However ATI is also a large producer of stainless steel products that are closer to what one could call “commodity” grade and cannot really be considered a specialty product.   Stainless steel adds certain alloys (mainly nickel, but many other are used) to prevent corrosion and rust. Growth in these products in highly dependent on economic growth, and competition is higher, and profitability is lower and much more volatile.

The slide below is borrowed from ATI’s 2012 annual report.

Some important things to note:

  1. 79% of sales are high-vaue products, only 21% is commodity grade

  2. potential growth areas like aerospace and oil/gas are 51% of sales

  3. the remainder is widely diversified, withonly an 8% exposure to the cyclical automotive business

[Read more…]

Carrols Restaurant Group – Biting Off More Than It Can Chew?

Sometimes an idea looks good at the start, but upon closer inspection it doesn’t meet the margin of safety or other criteria. Carrols Restaurant Group is an example of this. Here is a report written for Seeking Alpha Pro that illustrates this. There is a lot of potential upside to this company’s business model, but the current valuation and the lack of free cash flow make it a “pass” for now.

Carrols Restaurant Group – Biting Off More Than It Can Chew?

One of the points I have constantly tried to emphasize in my articles is “do your own work” and do not rely exclusively on data provided by financial websites. Carrols Restaurant Group (TAST) is a classic example of how relying on financial website data can cause investors to make significant errors in their analysis. If an investor uses the data provided by websites like Yahoo Finance, Google Finance or Finviz to name a few, he will see that the company has about 23 million shares outstanding. Multiplying the shares outstanding by $4.80 a share would give the company a market capitalization of about $115 million. TAST showed up on a low EV/Sales screen I run on the restaurant industry. However, this calculation would miss the fact that there is a convertible preferred outstanding that will convert into an additional 9.4 million shares. Therefore, these financial websites are understating TAST’s market capitalization by $45 million, which is a significant difference. So anyone doing a screen based on EV/EBITDA or EV/sales or even P/E ratio, would be getting a wrong impression of the current valuation of the company. While the company’s enterprise value is being understated, it also appears as though the company’s normalized EBITDA and operating margins are being understated as well. This article will analyze the company considering both situations.

Seeking Alpha Article


Body Central: Cheap for a reason, isn’t that always the case…

Investors have a tendency to look at stock charts after a stock has significantly increased in value and think the could have made that big return if they had just known about the opportunity at the time. In reality it doesn’t work that way. Most stocks that are near their lows or out of favor are “cheap for a reason”. Here is an example of one, Body Central (BODY), a former high flying growth stock that is now trading at one-third its peak valuation and more importantly less than enterprise to sales ratio of 40% and cash equal to 30% of the market cap. Similar stocks have been acquired at 2X the current multiple.

When stocks are out of favor and priced inexpensively, investors tend to focus on the reasons they are out of favor. When they are in favor and priced fully, investors tend to focus on the reasons they are priced that way. In truth, most of the time those reasons are always present, it is just that investors tend to focus on just the negative when stocks are declining and focus on just the positve when they are increasig.

Here is our take on the reasons BODY is cheap and some thoughts on what the reasons could be  when it isn’t cheap any more….

I have spent almost my entire career in the investment industry, over 27 years of it anyway, as an analyst focused almost entirely on “value” stocks. Most aspiring value investors are intellectually attracted to the investment style because it makes sense intuitively. Buy enough “safe” cheap stocks and thanks to mean reversion or shareholder activism or just plain time, your results should outperform the market. Investors see successful investment results ex-post and believe in “hindsight” they too could have made that investment. However, I believe that, “if you could have you would have.” What most investors fail to understand is that the value stocks that have done well where most likely “cheap for a reason” at the time the potential gains were the greatest and there was no clear reason or “catalyst” to buy the stock at that time. As others have said, “valuation can be its own catalyst.” What follows is an analysis of Body Central (BODY), a stock that is “cheap for a reason” and has no “visible catalyst.” Anyone that is still reading this article after that last sentence, thank you for your support!

Seeking Alpha Body Central Article

[Read more…]

A. H. Belo. Hidden Value or Value Trap?

We have posted several articles on Seeking Alpha. Here is one that analyzes A. H. Belo, the owner of our hometown newspaper, The Dallas Morning News.  We will continue to post articles on Seeking Alpha to help investors improve their analyis process and to provide a framework for further investigation of an idea.

Seeking Alpha

Here  is a PDF version.

Seeking Alpha AHC article



Should Denny’s Adopt Marcato Capital’s Plan For DineEquity?

In December 2012, Richard McGuire’s hedge fund Marcato filed an amended 13D on DineEquity (DIN) proposing that the company renegotiate its credit agreement with its lenders and call its high coupon debt to allow for a 100% payout of free cash flow. (Mr. McGuire is a former partner at activist William Ackman’s Pershing Square Capital Management.) On January 18th, 2013, DIN management filed an 8K, and disclosed that it does plan to:

hold discussions with certain lenders to seek amendments, including a re-pricing, of its senior secured credit facility.

In this article, I will look at DIN’s closest competitor in the family dining space, Denny’s Corporation (DENN), to see what might happen to its share price if it adopted a plan similar to the Marcato proposal. While DENN has been very aggressive in returning approximately $40 million in free cash flow to shareholders in the last two years, it does appear as though the stock could get a significant boost if management chose to return the free cash flow to shareholders in the form of a dividend and not stock repurchases. [Read more…]

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Ignite Restaurant Group’s Acquisition Of Macaroni Grill: Assessing The Potential Risks And Rewards

On February 7th, Ignite Restaurant Group (IRGannounced it was acquiring Golden Gate Capital’s 80% interest in Romano’s Macaroni Grill (RMG) for $55 million. According to an article in Nation’s Restaurant News, Brinker International’s (EAT) 20% stake was also part of the transaction. In this article, I will analyze some of the risks and rewards of the acquisition for IRG shareholders.


RMG is a 25-year-old restaurant chain with 210 units in 39 states. Brinker International acquired the chain in 1989. Golden Gate Capital acquired 80% of the chain from EAT in 2008. Golden Gate initially offered $131 million for its 80% stake, but that price was later reduced to $88 million as the financial crisis hit and financing became difficult and same-store sales declined. [Read more…]

Ruth’s Hospitality Group: ‘Steak’ Your Claim To A 13% Free Cash Flow Yield With Upside, Part 2

In part one of my analysis of Ruth’s Hospitality Group (RUTH), I showed how the company should be able to sustain a free cash flow run-rate of $30-$35 million using conservative assumptions of no growth in same store sales and units nor any improvement in operating margins. In part two, I will show that significant increases in beef prices over the last few years have masked the substantial improvement in the operating expense ratio of the company.

The good news is that the company has been able to maintain its high level of customer satisfaction and service levels while producing operating leverage to higher same store sales with relatively flat employee counts. If the company is able to increase same store sales, I expect this trend to continue. However, there will be a point where the increase in customer traffic requires additional staff in order to maintain service levels and customer satisfaction. Monitoring the company’s guest satisfaction levels can alert investors as to when this may be necessary. Finally, I will also look at unit growth potential.

Continue reading this article on Seeking Alpha >>