Magazine

Outback Turns Up the Flame


Value investor Scott Black was quick to snap up Outback Steakhouse (OSI) shares on Oct. 10, when it tumbled to 26, down from 40 in May. Many investors had lost their appetites for Outback as sales flattened in a weaker economy over the summer. The stock has since edged up--to nearly 28 on Oct. 16. Outback operates 925 eateries in 49 states, including more than 100 Carrabba's Italian Grill restaurants. Systemwide total sales are $2.3 billion.

Black, president of Delphi Management in Boston, who continues to buy shares, says Outback's sales and gross margins picked up during the five weeks before Sept. 25. Management sees a further 2% jump in same-restaurant sales, he adds. Gross profit margins, which dropped from 13.5% in 2001 to 11% in mid-2002, have snapped back recently to 12.5% to 13.5% because of lower food costs, notes Black. Food, 38.1% of sales in 2001, has fallen to 36.7%.

"Outback is a cheap stock," Black argues, based on projected 11%-to-12% sales growth and a price-earnings ratio of 11 times estimated 2003 earnings of $2.37 a share. The p-e is the lowest in the large-cap restaurant group, he says. Outback has net cash of $141 million and $5 million in free cash flow. He figures Outback will post earnings of $2 a share on sales of $2.3 billion in 2002, and $2.37 on $2.6 billion in 2003. The stock, he says, could get back to 40 based on 16 times his 2003 earnings estimate. By Gene G. Marcial


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