The Decline Of Cheaper Beef Prices

There are occasions when a top-down approach to screening stocks might be a good start. For instance, Time Magazine ran an article on March 2016 where it mentioned that beef price have finally started to decline after several years of run-up in prices. In the article, it cited a data from Bureau of Labor Statistics that beef prices have dropped by 2% from December 2015 to January 2016 while year-on-year prices on ground beef and other steak cuts have declined on the average of 6% to 11%. Industry experts are also predicting that beef cuts will decline by around 17% in 2016.

Having this in mind, investors can look for restaurant stocks that can benefit from these latest developments. Cheaper beef prices would definitely be passed on to consumers,

According to the company’s website, the company have more than 140 Ruth’s Chris Steak Houses including 20 international franchisee-owned restaurants in Mexico, Hong Kong, Taiwan, Tokyo, Aruba, Canada and Dubai.

The steakhouse story began in 1965 when Ruth Fertel mortgaged her home for $22,000 to purchase “Chris Steak House,” a 60-seat restaurant located in New Orleans, Louisiana. Over time, the company has stick to its proven business model of high-end steak experience and continued to grow the company opening of new stores and pricing power.

High-Income Market Insulated From Economic Slowdown
The company has solid track record in profitability. From 2013 to 2015, revenues have consistently grown from $322 million to $373 million in 2015 This scenario continued in 2016 since the company reported first quarter 2016 revenues of $102 million, or if annualized would translate to a full year revenues of $408 million. The consistent year-on-year topline growth has been mostly attributed to the company’s pricing power over its customers. In addition, they have taken advantage of the pricing power over customers through opening of stores additions as well as increasing its franchisees. As a result, net profitability followed growth in revenues, which increased from $22 million in 2013 to $30 million in

As disclosed, the company plans to open four new restaurants in 2016 in New Mexico, Texas, Cleveland and Massachusetts. Also, its franchisees are also expected to open in various locations. As shown in the below table, there are around 146 total restaurants in the network with 127 domestic locations and 19 international locations.

The main driver of the company’s revenues growing from $346 million in 2014 to $373 million in 2015 has been the growth in its store network. In addition to that, lower input costs from declining beef prices have enhanced its overall margins leading to a net profitability of $16 million in 2014 to $30 million in 2015. With the continued expansion in the store count, analysts are expecting at least $33 million of net profit in 2016 and around $35 million in the subsequent year.

Healthy EBITDA figures should drive shareholder returns
Looking at the EBITDA figures below under Chart 2, EBITDA has hovered around $32 million to $50 million from 2008-2015. Given that the management has strong capital allocation skills, this would be channeled to pay dividends, bring down its debt levels and share repurchase. All of these activities are aimed at improving its shareholder return over the long