I attended the annual meeting of Foodmaker on Friday the 13th. The executive presentations were pretty much a rehash of the points brought out in the annual report. The highlight was the series of commercial spots they showed to the shareholders, many of which I had not seen. We all know how much Jack-in-the-Box's ad campaign has contributed to their recovery and success in the marketplace, and these ads continue to deliver.
I came away with the impression that growth going forward will be steady, albeit conservative. They added 75 restaurants last year, and will continue to use internal financing to fund their expansion of 100 restaurants this year. Most of the new restaurants will be in existing markets. International expansion is on hold for the foreseeable future, and they are testing a concept in Texas where they combine a full-size restaurant with a gas station and a convenience store.
The CEO was asked about the progress with the Vons lawsuit from our very own Mr. Arnie Doolittle, who posts here on Silicon Investor. Arnie asked Bob Nugent if they were in negotiations to settle the lawsuit out of court. Mr Nugent explained that the lawsuit, which is a breach of contract suit against Vons for selling them unsafe meat, was filed over 4 years ago and the trial date has been pushed back many times, most notably due to changes of venue between San Diego and Los Angeles. Vons has also filed a countersuit. He jokingly wondered if they had achieved a record with the trial delays. At present, they are scheduled to go to trial on April 13. Mr. Nugent said that they had come close to a settlement a few years back, but that negotiations fell apart. He said very firmly that "I do NOT want to go to court." I took this to imply that he was either a) eager to negotiate with Vons or b) already in the middle of serious negotiations. However, he then went on to say that the trial date has been set and they were "ready to go to court." Coming after his statement that he really didn't want to go to court, this sounded weaker and more like a standard diplomatic posture that they were prepared to do battle if the other party wasn't going to come up with an acceptable solution. The impression I was left with was how firmly he said he didn't want to go to court. I suppose the logic is that any uncertainty about winning the case is bad, and that you could actually lose the case, no matter how good you may think your case is. A settlement of the lawsuit will be good for the stock, even if the two parties agree to dissolve the suit without any money changing hands. There have been significant legal expenses incurred over the years, and these will go away along with the uncertainty of a possible defeat. I have to say that I no longer believe it is very likely that FM is going to be awarded millions from Vons in either a settlement or a trial victory. I'll let Arnie comment further on this issue if he decides to show up here.
FM will no doubt continue on the very successful path they have defined for themselves in the highly-competitive quick service industry. I believe we own a very high-quality company in its sector, one that will continue to be a good, steady growth stock. However, most of us originally purchased FM as a value/recovery play. Well, that's happened and we've received the lion share of the return on that investment idea. Now we are increasingly wondering whether FM is worth holding or if we should look around for another play to invest our dollars in.
Where can we reasonable expect FM to go from here? I'm going to calculate a range of share prices based on several methods; you can decide for yourself which makes the most sense to you. Of course, there are other valuation factors beside earnings and growth rates, but I'll just use these for now. My numbers are based on the most recent First Call report dated 2/9/98. In it, they report a mean EPS of $1.07 for 1998, and $1.23 for 1999. The share price in the report was $17.69 on that date, with a P/E of 16.5. The PE on 1998 Calendar Year Mean is 15.8, while the PEG is 0.79. Industry mean for PE is 19.16, and 1.29 for PEG. If you do the math and assign a value based on the 1998 mean industry P/E of 19.6, FM should be about $20.50. If you factor in earnings growth and give FM the industry mean PEG of 1.29, it should have a P/E of 25.8, since it has a growth rate of 20% instead of the industry mean of 15%. This yields a share price of $27.61. Motley Fools like to use YPEG, so if you use the $1.07/share and a 20% growth rate, the YPEG yields a share price of $21.40. In summary, the estimated share price based on mean industry ratios should be:
$20.50 based solely on P/E
$21.40 based on YPEG
$27.61 based on PEG
As always, do your own research,
D. Kuspa |
