Castle Hill and/or others we advise may hold a material investment in the issuer's securities and may trade into or out of these securities at any time. Our Investment Ideas section of our blog are for informational purposes only and do not constitute investment advice.
Going forward we are going to try and post one or two brief investment ideas every month for our readers. Our hope is to post short bullet point ideas that are easy to understand and help drive our readers to do further research into a company to invest.
The following idea was presented by a well respected investor we follow so we cannot claim originality for finding this one. Thanks to Connor Haley of Alta Fox Capital. The ONE Group Hospitality, Inc., (STKS) a hospitality company, develops, owns, and operates restaurants and lounges worldwide. It operates in three segments: Owned Restaurants; Owned Food, Beverage; and Managed/Licensed Operations. The company also provides turn-key food and beverage services for hospitality venues, including hotels, casinos, and other locations. Its hospitality food and beverage solutions include developing, managing, and operating restaurants, bars, rooftops, pools, banqueting, catering, private dining rooms, room service, and mini bars. The company operates restaurants primarily under the STK brand. The steakhouse has an upscale high energy feel and breaks the mold of a male-dominated establishment. Female sales are over 50% of the total and liquor sales are 40-45% of total sales compared to 30% of an average competing steakhouse.
STKS is a valuable brand that has historically been mismanaged. It has recently transitioned from a poor CEO to an exceptional CEO. The improvement in STK operations and profitability under new CEO Manny Hilario has been both immediate and dramatic. Company owned same store sales improved from up 0.5% in 2017 (under previous leadership) to up 9.4% in 2018 under Hilario’s leadership. Margin increased from 8.7% to 12.3%. All of the company’s stores are now profitable. Importantly, the company has said they are still “early on in margin improvement” and that they expect margins to be at or exceed competitors’ levels within 2-3 years. This is realistic given STK’s higher than average alcohol mix (which carries much higher margins than other restaurant items) compared to peers.
Management has provided long-term guidance of 3-5 licensed STK store openings, 1-2 hotel food & beverage new operations, and potentially 1 new company owned store a year. Even on management’s guidance, the stock is trading at prices that seem too cheap given the growth profile of the business. STKS is trading at a nearly 10% FCFE yield on 2019E numbers despite estimated revenue and EBITDA growth of 13.6% and 27%, respectively.
There are a few potential risks to STKS. The first risk is the company tries to expand too fast. Previous management made this mistake so hopefully they aren't a repeat offender. The second risk is the former CEO owns 25% of the stock. If he sells it could drive the stock down. The third risk is a general recession. The average ticket is high at over $100, so if the economy turns, high-end discretionary venues like STK could be hit. Lastly, the stock only trades a little over 50,000 shares a day.
When we discovered this idea the stock was trading at $3.10 per share.