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Archive for May, 2010

Mariusz Skonieczny, founder and president of Classic Value Investors LLC and author of the Classic Value Investors website and his book Why Are We So Clueless about the Stock Market? Learn How to Invest Your Money, How to Pick Stocks, and How to Make Money in the Stock Market, has provided a guest post on Ark Restaurants Corp (NASDAQ:ARKR).

Here’s his idea:

Business

Ark Restaurants is a New York corporation founded in 1983. Over the last two decades, the company evolved from being a holding company of small mid-priced to upscale restaurants in New York to a company with a wide range of restaurant styles with a variety of concepts. Today, it owns and/or operates 20 restaurants and bars, 30 fast food concepts, catering operations, and wholesale and retail bakeries in New York, Nevada, New Jersey, Connecticut, and Massachusetts.

Moat

A moat is what gives a company a competitive advantage which allows it to generate and maintain high returns on capital by keeping competitors at bay. Since anyone can start a restaurant, the barriers to entry into this business are low. Despite this fact, Ark Restaurants was able to create an economic moat around its business, and this is evidenced by the returns on equity below.



Traditionally, there are two different business models for restaurants. The first is operating a restaurant chain, such as TGI Fridays, and the second is operating an independent restaurant. Restaurant chains benefit from brand recognition, and this allows new franchisees to build clientele faster and to break even sooner in a new location. Also, the chain restaurant structure offers a cost advantage by centralizing backroom operations and taking advantage of economies of scale. The independent model, on the other hand, offers something else that a chain restaurant model does not – a unique atmosphere, which often allows the restaurant to charge higher prices than competitors in its class.

Ark Restaurants employs a unique business model which combines the best of both models. It operates each restaurant as a separate business with its own theme. By having multiple restaurants in the same city, it is able to benefit from economies of scale by centralizing backroom human resources and purchasing operations. Because it can still offer a unique atmosphere, it can price its meals above chain restaurants, but below independent restaurants of the same quality.

Another advantage of positioning multiple restaurants in the same area is the ability to vertically integrate operations. Wholesale bakeries are strategically located so that they can serve the company’s local restaurants as well as provide bakery products to other restaurants. The catering business is also located in the same area as the local restaurants.

Because each restaurant operates under a separate theme, it has to establish its own moat or competitive advantage to be a successful operation. The management achieves this by location. The company builds its restaurants in high-impact locales where customers are practically captive. The company’s CEO, Michael Weinstein described this advantage in his own words:

“If you take a Bryant Park Café or a Sequoia in Union Station or our waterfront Sequoia in Washington, I don’t care how many restaurants are built around us, we are going to have an advantage because these site-specific restaurants do good business because of the density of population.”

In the restaurant business, rent is a very significant expense which singlehandedly can make a restaurant a success or failure. Ark Restaurants has an ability to get lower rents than their competitors, and this creates a huge advantage. Many new restaurant owners focus so much on the dining part of the business that they fail to analyze if their restaurant can sustain paying rent and, as a result, many fail within a relatively short period of time. Because Ark Restaurants has been in business since 1983, possesses a pristine balance sheet, and did not ever miss a rent payment, landlords are happy to lease to Ark Restaurants at lower rates. Also, the company has a reputation of having superior negotiating skills with landlords. The management is not afraid to walk away if the numbers do not work in Ark Restaurants’ favor.

Another often overlooked advantage that Ark Restaurants has is lower employee turnover than its peers. This translates into lower training costs and, at times of extreme distress, lower payroll costs. The company’s management has done a tremendous job building loyalty among employees. For example, when one of the locations shut down for an eight-month remodeling project, the company kept the entire staff on payroll even though Wall Street was not too happy with it because of its short-term effect on earnings. The company also offers medical benefits to employees who work three shifts and allows artists and actors take time off for gigs with a guaranteed job upon their return. While treating employees in such a manner is considered unconventional, it definitely pays off in the long run. One example of this payoff happened after 9/11. As a result of Ark restaurants’ reliance on tourist locations and an overleveraged balance sheet, the company nearly went bankrupt. The employees, seeing significant drop in business, voluntarily approached Ark Restaurant’s management and offered to take a temporary pay cut. This was tremendously helpful because it allowed Ark Restaurants to cut payroll from $40 million to $30 million, which is significant considering Ark Restaurants’ size.

Finally, Ark Restaurants is one of the best payers in the industry. Usually, the company pays its suppliers within 10 days. This allows the company to enjoy bargaining power and suppliers’ loyalty.

Click here to download Mariusz’s report on Ark Restaurants – ARKR (.docx).

[Full Disclosure:  I do not have a holding in ARK. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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The incredible Zero Hedge has an article on Seth Klarman’s address to the CFA Institute:

Seth Klarman was speaking at the CFA Institute earlier, and in typical fashion cut to the chase: in summarizing the current market, the Baupost founder said he “sees few bargains in the current environment and predicted on Tuesday that the stock market could suffer another lost decade without any gains.” And the punchline: his description of market conditions which he compared to “a Hostess Twinkie snack cake because everything is being manipulated by the government and appears artificial.” Such facility with words, there is a reason the man runs a $22 billion fund and his book “Margin of Safety” has been out of print for years, and sells for a $1000 on ebay.

Sayeth Seth (via Reuters):

“Given the recent run-up, I’d be worried that we’ll have another 10 years of zero returns,” Klarman, who rarely speaks in public, said at the CFA Institute’s annual conference in Boston.

“I’m more worried about the world broadly than I’ve ever been in my whole career,” Klarman said.

Inflation is a risk that Klarman said he is particularly concerned with given the government’s high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said.

The puts, which Klarman said he viewed as “cheap insurance,” will expire worthless even if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay.

Typically, Baupost focuses on out-of-favor stocks and bonds. Klarman cleaned up in 2007 and 2008 buying distressed debt and mortgage securities that later recovered.

One area Klarman said he is currently scouring for potential investments is private commercial real estate below the top quality. Publicly traded real estate investment trusts, however, have “rallied enormously” and are “quite unattractive,” he said.

“We’d rather underperform a huge bull market than get clobbered in a bear market,” he said.

For those of you who don’t want to shell out $1,000 on eBay for Seth’s out-of-print Margin of Safety and have only recently become aware that the Internet is available on computers, the Zero Hedge article includes a link to a scanned copy of the book, available at a price even an anarcho-capitalist could embrace.

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Greenbackd has had some great investment ideas contributed in the past by readers, and so I’m extending another open invitation to anyone who wishes to submit a post for publication. The only requirement is that it be within the remit of Greenbackd, which is say that it is an undervalued asset situation with a catalyst.

Email your idea to greenbackd [at] gmail [dot] com.

Fame and fortune await.

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Nyer Medical Group Inc (OTC:NYER) has announced its sole and final liquidating distribution will be $2.08 per share.

We started following NYER in November last year (see the initial post) when the stock was trading at $1.75, and NYER had announced the liquidation subject to the approval of its shareholders and the closing of two transactions. The board estimated that shareholders would receive a liquidating distribution of between $1.84 to $2.00 per share, so the $2.08 per share exceeds the high end of the estimate, and a represents a total return of 19%. The S&P500 returned 8.9% over the same period, representing an outperformance of 10%.

Here is the release from NYER:

Nyer Medical Group, Inc., (NYER: News ) announced that on May 12, 2010, pursuant to its previously announced, shareholder-approved Plan of Dissolution, the Board of Directors of the company approved a sole and final liquidating distribution of $2.08 per common share to holders of the company’s common stock as of record date. As previously disclosed, the record date is May 3, 2010.

The Company expects to begin making this distribution on May 20, 2010 to all stockholders of record as of the close of business on May 3, 2010, including the Depository Trust Company, which is the entity that holds the Company’s common stock for stockholders who own shares through a broker. In order to receive their pro rata portion of the distribution, stockholders must present satisfactory evidence of their share ownership.

As previously disclosed, Nyer is in the process of the orderly wind down and dissolution of the Company pursuant to the Plan of Dissolution, which is described more fully in the Company’s Proxy Statement dated December 17, 2009, and is expected to be completed in approximately 30 days.

Hat tip Rogermunie.

[Full Disclosure:  I do not have a holding in NYER. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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