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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