JOY and RT

One thing I haven’t been doing lately is writing up on stocks. That’s mainly because I haven’t found many worthy of investing in. I’ve decided to write up more of the stocks that I reject for a couple of reasons. Firstly, I am often wrong in rejecting a stock and readers may see a bargain where I have failed. Secondly, I want to take more time to monitor how my rejected ideas do over time, to see if I can improve as an investor.

This article covers two stocks which appear at attractive prices, but for one reason or another I have decided not to invest in. They may appeal to others though.

Share price: $52.03
P/E: 7.7
Return on Investment: 18.7% (TTM), 39% (5 year average)


Joy is a manufacturer and servicer of high productivity mining equipment. Coal and resource stocks haven’t been doing well lately, and naturally, neither has Joy. A great place to hunt for a bargain then.

Joy’s latest quarter conference call paints a bleak picture. Bookings were down 36% on the previous year, meaning companies are ordering less. Net sales were down 5% to $1.3bn and given the poor orders, sales are expected to fall to $4bn a year, compared to a peak of $5.7bn in 2012. EBITDA margins are also at all time highs at 22.5%, compared to a 10 year average of 18.1%. In a competitive environment it’s highly unlikely EBITDA margins will remain at highs so I think net profit on $4bn of revenues could come in between $400m and $500m. Compare that to the Enterprise Value of $6.4bn and the stock doesn’t look as cheap, especially if this is a long term cyclical shift in the commodity markets.

But there are positives, sustaining CapEx is said to be around $125m a year, roughly similar to depreciation so profits should come through as free cash flow. It will soon stop topping up its pension fund, freeing up another $100m in free cash per year. Management has shown to be competent, conservative and decent capital allocators with an 18.7% ROI. They have even managed to reduce inventory and trade receivable days despite the poor market conditions. Also any improvement in the mining industry would benefit Joy.

However, there are too many risks for me, and although I think it’s a well run business, with poor earnings expected throughout the next couple of years, it doesn’t strike me as hugely undervalued. I will watch and wait to see what happens with the order book, if it improves I will revisit.

Share price: $6.12
P/TBV: 0.7

TearsheetRT owns and operates 706 Ruby Tuesdays, 18 Lime Fresh Mexicans, GrillMarlin & Rays, and Wok Hay restaurants. The operating business is nothing special, so this is essentially a P/TBV play. I was drawn to it when I learned Joel Greenblatt has invested in it, a famous investor in special situations.

RT has been running into problems of late, under the old management team, the company tried to position itself as a high-end brand and raised pricing. But, this action did not tie with the company’s real estate locations and customers. Now, management is repositioning the company as a value-oriented one.

The results?

  • Like-for-like sales down 11.4% in Q1 2014, forecast to continue
  • Diluted loss per share of $0.36 compared to earnings of $0.05 last year.

Clearly things aren’t working, but what about the balance sheet? Well the play here would be the real estate it holds on its books. It owns most of its restaurants with mortgages, and has already started a sale and leaseback program albeit on a small scale. That is the angle here but it has a major disadvantage. Unlike a company that may have a big piece of real estate worth something on the books, this is 700+ pieces of real estate. Selling that amount takes a long time, and as such I think a discount is justified. And with so many properties it just isn’t possible for an investor to know what they are really worth.

I’m happy to pass on this as the operating business is doing poorly and who knows what those properties are really worth.

Disclosure: JOY, RT – no position

Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.

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