Why I like McCormick & Schmick’s Seafood Restaurants(NASDAQ:MSSR) as an investment

I have known Bill McCormick for about 25 years, as he and I met at my Hemenway’s Seafood Grill & Oyster Bar with mutual friend and RI Attorney General Jim O’Neil. Bill has spent the past eight years in New Zealand, as Ambassador for President George Bush. He is no longer involved day to day in the business, but still has an office there, comes in occasionally and I called him the other day to say hello. I told him the company looked very cheap to me and that I had listened to the new MSSR CEO recently at the Cowen Conference in NYC. Bill and I shot the breeze about the industry, Rhode Island, and his life in NZ. I was tempted to ask Bill if we should buy the company outright with a private equity sponsor, but I didn’t go there, when he told me that he was now 70 and that the industry has become so tough, and that we had it easy comparatively in our day. I couldn’t disagree……

McCormick & Schmick’s is a national upscale seafood chain with 88 units and 6 Boathouse restaurants in Canada. It was written up yesterday as a buy on RealMoney Silver by Tim Melvin. Here’s what Tim said:

“McCormick & Schmick’s Seafood Restaurants (MSSR) is still my favorite name in this space. The company operates 88 McCormicks & Schmick’s locations in the U.S. and six Boathouse locations in Canada.

The menu changes daily and is printed twice a day in most locations, based on available fresh seafood selections. The offerings also are a better fit with the growing focus on eating healthy, than the more traditional high-end steakhouses it competes with. The restaurants can still accommodate the beef-dependent, but seafood makes up the bulk of the menu. Dinner entrees start at $19.95, and they feature 10 entrees under $10 every day as lunch specials.

Like everyone else, this chain has struggled. For the third quarter, it reported a revenue decline of 13%, with same-store sales down more than 18%. Traffic in locations open at least a year fell 14%. Despite the revenue drop, the company managed to stay profitable, earning 9 cents for the quarter, flat with the year-earlier quarter and up from break-even in the second quarter.
Currently, analysts on average estimate earnings of 17 cents a share for the fourth quarter and 37 cents for the full year. The company is due to report on March 1.

Management has been cautious so far. It hasn’t put too much stress on the balance sheet, opening just two new locations in the past year. The balance on the revolving credit line is a little more than $18 million, at an average rate of 2.8%, making the debt load more than manageable.

The stock trades at 1.1 times tangible book value, which makes the company almost too cheap not to own. Since its EV/EBITDA is a little more than 5, a broad market pullback would make the stock a buy.

It is a little more difficult these days to find that perfect gift for Valentine’s Day. It is equally difficult to find a good business that’s priced cheaply enough to put on my buy-in-a-decline list. McCormick & Schmick’s fits the bill on both counts.”

I wrote to Tim and told him that I also liked the following:

1. MSSR is the ONLY sizable upscale seafood chain in America – making it a very DEFENSIBLE concept, with very little competition. Very different than the upscale steakhouse business that has become such a crowded space.

2. MSSR is selling at a very low valuation on a couple of metrics that I like – Enterprise Value divided by the # of units. At yesterday’s close, the valuation per unit was approximately $1.4M per unit. According to their 10-K, it costs about $4M to build a unit today and they usually get $1M in TI improvement. The stock is selling for less than half the asset replacement cost….that is cheap.

3. MSSR is selling at a very low Sales/Enterprise Value ratio – about .35 or about 35 cents to a sales dollar – a very low metric too.

Nicole Miller Regan, restaurant at Piper Jaffrey changed her rating from Underweight to OVERWEIGHT on MSSR in January!

So what’s wrong? Sales stink and margins have deteriorated – the economy has taken its toll. Sales at The Capital Grille have improved according to the last Darden conference call from -17% in September to -6% in November…..quite a trend improvement, that should also have some application for sales improving for upscale MSSR……or at least let’s hope so.

Darden should look at buying MSSR. They have the seafood purchasing machine in place, and they now have casual steak and upscale steak with Longhorn and The Capital Grille; so why not Red Lobster, the casual seafood leader and upscale seafood leader, McCormick and Schmick’s?

Then there are also private equity players as well as the colorful character and industry legend, Tilman Fertitta. Tilman scooped up 9% of the company when the stock crashed last spring. He paid an average of about $2.64 a share – great buy Tilman!

I own some stock, and I like the prospects……let’s just hope we don’t go into a double dip recession! A STRONG BUY in my book!


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