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Reservations At Morton's

Posted: Aug 08, 2007 15:35 PM by Glenn Curtis

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Tickers in this Article: MRT, RUTH

Like many people, I like to eat a big ol' steak for dinner every now and then.

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Among my favorite steakhouses is a place called Morton's. The meat is always cooked to perfection; it's not fatty, and the portion size is quite generous. In addition to being a great steakhouse, some people also believe that Morton’s Restaurant Group (NYSE:MRT), with its 74 locations worldwide, is a worthwhile investment.

Does a terrific meal equal a solid investment? I hate to say it, but in Morton's case, the answer is no.

Uninspired Earnings
Now don't get me wrong, Morton's is turning out decent results; they just aren't spectacular. In its most recent second quarter, the company reported earnings of 14 cents per share on $85.6 million in revenue. Those numbers were just north of analyst forecasts, which called for the company to earn 13 cents per share on $83.9 million in revenue. In addition, its same store sales for the period were up a healthy 4.3%.

However, in the grand scheme of things, those numbers certainly weren't anything to write home about. While revenue was up about 10% from the prior year, earnings were actually down a penny. Beyond the most recent earnings, what's the catalyst going forward?

An Extra Helping of Risk?
While Morton's recent performance has been decent, what if the economy begins to slow, especially in the U.S. Northeast where the company maintains a fairly heavy presence?

What if consumers scale back their spending in the face of a waning real estate market and an uncertain stock market? Will they be willing to spend big bucks on a fancy steak dinner, or will thriftier alternatives such as the Outback Steakhouse (now a private company) prevail?

Ready for another scary "what if"? What if there is another mad cow (bovine spongiform encephalopathy) scare here in the United States? Also, England is now dealing with another foot-and-mouth disease outbreak, public fears could spill across the pond. Consumers may opt for something other than beef. Remember, beef is a bit of a staple for steakhouses!

Another thing to consider is the cost of beef and restaurant supplies. They continue to edge up consistently every year - which means the company will have to continue to show positive same-store numbers in order to overcome those costs.

Overall, if just seems like there are too many "what ifs" to worry about with this stock.

Can You Stomach The Valuation?
In fiscal 2007, the company estimates it will earn between 91 cents and 93 cents per share on revenue of between $353 and $358 million. And in 2008, Wall Street is figuring that the company will report earnings of $1.08 per share on $398.4 million in sales. That implies an expected top line growth of about 12%, and a bottom line growth of about 17.4%.

But are those numbers really attainable given the above-mentioned macroeconomic risks? Even if they are, the company currently trades at just over 19-times this year's earnings forecast and at about 16-times the current 2008 consensus estimate. That doesn't sound like much of a bargain.

Also its competitor Ruth's Chris Steak House (Nasdaq:RUTH) trades at similar multiples, roughly 16.4-times this year's consensus estimate of 94 cents per share, and at about 14.6-times the current 2008 estimate of $1.06 per share, and that its expected to grow its top and bottom line at a comparable rate. Again, there is no bargain here.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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