A lesson of deep value with Luby’s
I’ve been following Luby’s (NYSE: LUB) in one way or another for the past decade or so. I looked at the stock, waiting a while to buy, but that moment never came.
The reason I watch the business is simple. It always seemed cheap. Today, this is still the case. At the time of writing, the stock is trading at a price to book ratio of 0.7. It is not possible to analyze the earnings or cash flow multiples of the group because it has not generated any cash flow or positive earnings for more than five years. Still, if you just look at the book value of the stock, it looks cheap.
Being cheap isn’t the only reason I’m watching the business. Whenever I’ve delved into his numbers and earnings conference calls, it always seems like the company is on the verge of a breakthrough. Management is always optimistic that changes are happening, growth is being felt and consumers are coming back. Yet the turnaround never happened, and there are several valuable lessons here.
Lessons of deep value
The biggest problem over the past two years is the company’s lack of value creation. In saying this, not only did it not create value, the company destroyed it.
Since 2015, equity has grown from $ 175 million to $ 74 million (end of 2020). There is no point in buying a stock for less than the book value if the book value continues to decline. The valuation may improve, but shareholders will still have a low return if the book value has fallen.
The other lesson I learned from this scenario is about the downsides of being an absent investor. I cannot claim to be an experienced restaurant investor. I can’t even really claim to have any experience in the restaurant industry. This held me back when analyzing Luby’s outlook. This meant that I was still too dependent on management analysis. I had no direct experience of the issues and headwinds they were trying to deal with, nor did I have direct knowledge of the experiences they provided to other consumers.
It’s all well and good for the management of a company to say that they are bringing consumers back to restaurants – they are not going to say the opposite. Investors very rarely receive a candid analysis of the business environment. More often than not, it is a positive image painted by management to provide the best prospects. The numbers are not designed to be misleading, but the picture is sometimes presented in the most optimistic light rather than a balanced projection.
However, there is a twist in this story. At the end of November, investors voted to dissolve and liquidate the company. The move was supported by its major shareholders, including Christopher Pappas, who has been President and CEO since March 2001 and controls 18.4% of the total shares outstanding. Harris Pappas, who was the COO until 2011, controls 17.9% of the shares.
At the end of 2020, Luby’s financial statements placed the company’s book value per share at $ 2.40. According to the company’s latest update on the liquidation process, it expects to make $ 5 per share from the liquidation of assets this year. Sales of assets have achieved much more than the initial figures expected.
The last time the stock traded above $ 5 was in 2013, so it will be a happy ending for long-suffering investors. In an age when massive debt is all too common, this is one of the few cases where shareholders will actually get something out of the liquidation.
For foreigners, this is a lesson in the difficulty of investing in value. Luby’s has looked cheap for years and would have remained cheap had it not been for the liquidation event. And even the liquidation event has some surprises in store. It turns out that the assets were worth more than double the value of the balance sheet.
This scenario shows how important it is for investors to have a good understanding of their target companies, and when looking for value investing opportunities in depth, focus on finding an event that will crystallize value.
This article first appeared on GuruFocus.