Wednesday, February 01, 2006

Ruby Tuesday Gets No Love

It's damn near time the Street picks up on Ruby Tuesday's (RI) potential.

Ruby is a restaurant concept in the bar and grill segment of casual dining.

Although Ruby could face heated competition from Applebee’s (APPB) and Chili’s (EAT), we conclude a basket of themes will propel the stock above the $30 level.

One, consumer trends favor Ruby Tuesday’s strengths.

Ruby Tuesday is the only chain with a full service salad bar. They also are the first chain to provide nutritional information for almost every menu item, which resonates with our current healthy foods/organic boom.

Market trends point to huge growth for Ruby Tuesday -- there is a long term trend in the US restaurant industry for consolidation.

According to Technomic, the industry’s top 100 companies controlled 52% of total chain restaurant sales, while the next 100 controlled only 5% of total chain restaurant sales. Did you get that? A buyout isn't out of the picture.

According to the MBA students we talked to at the University of Michigan, "this consolidation also allows them to start their first advertising campaign in the 32 year history of the company. They had always used word of mouth and couponing to advertise, but now they want to advertise to the 68% of people that had never heard of Ruby Tuesday."

Lastly, Ruby Tuesday's valuation story is far from ugly. Shares trade hands at 18 X earnings, just under what its biggest rival and industry trade at.

A premium multiple is warranted, considering Ruby's ROA profitability.

Although our favorite play on the casual dining boom is Darden Restaurants (DRI), it wouldn't hurt tracking Ruby Tuesday, too, especially now that they are about to begin advertising.

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