One other thought about KONA:
Think about this....Book value today is about $3/share.
There are several analysts covering KONA. Every project for current year earnings is NEGATIVE, there is variation amongst how negative it will be.
Every analyst also thinks next years earnings will also be NEGATIVE.
Of course, I am somewhat skeptical of analysts estimates...and of course book value is simply one metric...but I still think it valuable to gauge your estimation of return and probability of achieving it.
Two thoughts about this post: first, book value is generally not at all illustrative of the intrinsic value of a restaurant. I would look to the earnings power of a restaurant and not to the book value. Not that I am that smart and figured this out, I learned this lesson from Warren Buffett at a Berkshire annual meeting years ago. He described certain types of businesses like restaurants and the verbatim quote was essentially: "Look to earnings power, not to book value."
Secondly, sometimes analysts having a negative opinion of a stock - I view as a very good thing. We are trying to buy undervalued securities and for a company to be undervalued there generally has to be some kind of misunderstanding or some element of the company that is unloved. Negative analyst sentiment in the case of many undervalued securities not only reflects that misunderstanding but also contributes to it. I believe that may be the case with this one; this is a micro cap company where the numbers tell a misleading story (negative EPS due to buildout, while operationally the company is significantly profitable). In this circumstance, it is not surprising to me that value-oriented deep-dive investors would have a different viewpoint than public analysts.
I think there are several members that do not understand what I am trying to convey about book value in relation to the restaurant industry.
A). Book Value is not the single best "valuation" method for restaurants, NO DOUBT. HOWEVER, you've got to look at the asset base and the leverage. Book value will allow you to get a handle on that.
Are you seriously going to tell me that book value has no weight or relevance in valuing a restaurant?
With KONA hitting new 52 week lows, the stock is still trading for something like a 14X EV/EBITDA valuation!
They've got about $26MM in debt. Then they've got a bunch of leases. Leverage aplenty!
B). I would argue the single most important metric is sales. Everything else flows from sales....
C). You've also got to look at margins and profitability. This is generally a low margin industry...Some of the best operators (company owned locations with NO or few franchisees) are getting about a 6% NET on sales. A lot of restaurants simply don't make ANY money at the end of the quarter, end of the year...Maybe 25% of the industry (maybe more) is not making and money at all. The next 25% is making money, but just barely...below 1% to maybe 2% NET on their sales. Move up another 25% and you are maybe looking at 3% or 4%. Go to the TOP QUARTILE of companies and you are looking at 5,6,7 percent NET on sales.
KONA is doing about $15.75 a share in sales today. Fast forward a couple of years, assume they can execute their plan AND assume that the economy doesn't go back in the ditch, AND assume that they don't dilute existing equity holders (?book value?) and they are doing about $20/share in sales.
If KONA can execute their plan successfully, let us assume that they move into the top quartile of companies. They are then making about 5% or 6% net on sales. They are then netting about $1/share. Maybe a bit more, maybe just a bit less, but about $1.
HOWEVER, you've got to discount the chance that they can't execute, OR that the economy goes south, AND you've still got to wait 2-3 years to get there.
So what I'm arguing here is that while KONA very well may execute AND it may turn out to be a good investment, THERE IS A LOT OF RISK HERE that I don't think is being adequately assessed. As a shareholder, are you being adequately compensated for that risk?