Is O’Charley’s(NASDAQ:CHUX) the steal of the century or a value trap?

O’Charley’s has been on my radar screen for quite awhile as a beaten down restaurant stock offering seeming real value. However, only recently have I been comfortable with the likelihood of real positive catalysts on the horizon that can turn around the downward spiral that the this Company has been in. There are 235 company-owned O’Charley’s, 116 company-owned Ninety Nine restaurants, and 11 company-owned Stoney River steakhouses for a total of 362 company owned restaurants. There are also 10 franchised O’Charley’s.

Let’s look at a very quick analysis of the value as of today:
Company owned Units: 362
Shares Outstanding: 21,681,919 shares as of 8/6/10
Market Capitalization: $130M (@ $6 stock price)
Long Term Debt: $117
Total Enterprise Value: $247M

Real Estate Owned : According to Raymond James analyst, Bryan Elliot there was an appraisal done of the 100 units REO(real estate owned) early this year that showed a value of almost $200M, which is about $4 a share after the long term debt is paid. But let’s just be real conservative and give it a value of $150M which would more than wipe out the debt. So then take the Enterprise Value of $247 and subtract $150M, which leaves us at $97M for 362 company owned units. So we get to a market value per unit of an eye-popping $268,000…….WOW….now, that is some serious value. The cost to build and equip a unit today on average on leased land is likely between $1.5 and $2M. Free cash flow yield for 2010 is projected to be 20% according to RJ’s Elliot. Also by the way, EV/EBITDA is 4x 2010 EBITDA, and 5x 2010 FCF.

Now for the cataysts:

1. Phil Hickey, a friend and former remarkable value builder at RARE Hospitality(took over RARE at less than$200M market cap and sold to Darden for $1.3B) is the Chairman and Acting CEO today. He just filed with the SEC that he just personally purchased 20,000 shares this week at $5.46. The Company with Phil as the lead has just hired David Head to begin as CEO on September 1. Read the release by clicking here . Phil is a very smart operator and I have faith that Phil truly believes that David Head has the horsepower to succeed in a CHUX turnaround. Phil is staying very involved too which is important.

2. Private equity guys are actively looking for bargains in the restaurant space. I have received more calls that ever before with regard to any  ideas I might have. This situation is just too cheap for a smart PE firm to ignore. Also a PE firm could do a NNN transaction on the REO, so out of pocket would be quite nominal.

I would be far more wary if Phil wasn’t the Chairman, but he is! Phil is one skilled class act, so I am betting big on him and his pick, David Head to lead a multi-year turnaround of the company, regardless of whether a PE firm  picks it off.

For full disclosure, I own both the common stock and the 2013 bonds of O’Charley’s Inc.

Risks:

Plenty….after all, this is a poor performing company in the casual dining restaurant business in a very soft economy.

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