Beating Buffett

Famous Dave’s of America {DAVE:$7.30} and its subsidiaries engage in the development, ownership, operation, and franchising of restaurants under the Famous Dave’s name. The company operates full-service and counter-service restaurants. As of January 3, 2010, it owned 177 restaurants operated in 37 states, including 45 company-owned restaurants and 132 franchise-operated restaurants. Dave’s specializes in hickory-smoked, off the grill items such as St. Louis-style ribs, Texas beef brisket and Georgia pulled pork with all the trimmings. The company was founded in 1994 and is based in Minnetonka, Minnesota.

Restaurants have been a ‘hot’ industry group as fears of the next Great Depression have been fading and life in the USA has been getting closer to the old normal. Casual dining stocks have been excellent performers since the March 9, 2009 low point.

Here is a chart that illustrates that point clearly:

Even though all six of the stocks are up substantially from their yearly lows only Cheesecake Factory shares now trade at a relatively high P/E. Famous Dave’s looks to be the best value in the group based on both last year’s and projected 2010 earnings.

Here are DAVE’s historical per share, fully diluted numbers:

EPS hit an all-time record in the recently completed year despite the poor economic conditions. Management has been buying back shares. They retired 107,012 shares (avg. cost $6.27) since an August 6, 2008 authorization to repurchase up to 1,000,000 shares. At year-end 2009 there were 9.114 MM shares outstanding.

The company was able to retire five long-term notes during 2009 (totaling $7.3 MM including pre-payment penalties) that had interest rates of 8.10% - 10.53% and maturities of February 2020 and October 2023. This should result in substantial cost savings for 2010 and beyond.

On March 3, 2010 the company purchased assets of seven Famous Dave’s units in New York and New Jersey that were previously held by a franchisee. Management forecasts an additional $14.5 MM in revenue (net of lost franchising royalties) for the remainder of 2010. This should be profit neutral for this year and accretive in future years. In addition, DAVE’s will book a one-time non-cash gain in Q1 to account for the difference between the purchase price and the fair market value of the acquired assets.

The total restaurant count has steadily increased over the years. Company-owned units moved from 38 to 45 from 2005 – 2009 and franchised stores rose from 88 to 132 over the same period. There were 94 additional franchised units under commitment for development as of January 3, 2010.

Famous Dave’s appears to be a well-managed, fiscally healthy growth company at a very non-growth multiple. The consensus views for 2010 and 2011 are now $0.70 and $0.81 /share. If the shares rebound to even 13.5 times this year’s earnings they would sell for $9.45 or 29.4% above last week’s closing quote. Standard and Poors seems to agree. They carry a ‘fair value’ for DAVE of $9.40 /share. That same multiple on the 2011 estimate would bring them to almost $11 /share.

Is that a reasonable expectation? It’s probably too conservative a target based on past performance. DAVE shares touched highs of $13.61, $15.00, $17.24, $23.37 and $14.36 during calendar years 2004 through 2008 – all years when earnings per share were lower than they are today. In fact, the absolute low yearly prices in 2005-2006-2007 were $9.39, $11.09 and $11.03 respectively.

Disclosure: Author is long DAVE shares and short DAVE puts.

I first wrote up DAVE shares here on October 4, 2009 at $5.40 /share.