Originally Published August 15th, 2022

The weekly value finder is back as we continue to dive into lesser known companies that seem to be under loved by the markets.

So what do we have in store for this week? Here are the highlights:

• A current PE of just over 6

• Price to Free Cash flow under 6

• Price to Sales of .46

• Heavy recent insider buying

May I present to you, Ark Restaurants Corp. (ARKR).

Ark Restaurants owns and operates 17 different restaurants and bars as well as multiple fast food concepts and catering operations. The restaurants are located mainly in New York, Washington D.C., Las Vegas, Atlantic City, Florida, and Alabama. So basically they are set up in the hot spots of trendy and swanky patrons that also are heavily involved in tourism.

The biggest thing that I notice when going through the list of restaurants that Ark owns and operates (link here) is that they have set up their small portfolio to focus on memorable dining experiences that patrons are sure to share on social media. This to me is the future of dining, where food still matters, but the ambience drives the customers to return.

This is where Ark thrives. From the Rustic Inn in Florida that is built to feel like an authentic old timey fisherman’s paradise, to Gonzalez y Gonzalez, a Las Vegas based Mexican restaurant that prides itself on its tequila selection and provides private DJ events. If that isn’t enough, head to New York and Bryant Park Grill (pictured above), that is a “Parisian-style dining situated behind the landmark New York Public Library, Bryant Park serves as a stunning backdrop for Bryant Park Grill.”

Enough of the description though, what about the business?

Taking a look through the balance sheet there are a couple of things that jump off the page immediately. The first is that the company is basically at a zero net debt, with $28 million of cash & equivalents on hand as of the most recent conference call (transcript here) and long term debt of around the same ($28.5 million).

The second is that management is solid. The company has been relatively consistent since June of 2020 in paying down their debt and being responsible with the balance sheet. While they have been helped with PPP loan forgiveness, management has steadily strengthened the balance sheet since the pandemic.

Also, the company has recently reinstated a quarterly dividend of $0.125 per share. Here is Michael Weinstein’s (CEO) statement about the dividend:

We resumed our dividend, which you saw in the announcement. Basically we extended a projection to the end of fiscal 2023, which is September 2023. And said, if you know things go according to what we're projecting this is the amount of cash that will have on our balance sheet after paying debt, after an acquisition that we are projecting we may do the payment of debt, payment of taxes, payment of interest. And we decided that conservatively we can resume our dividend payments and still not encroach on any things we want to do in terms of expanding the business.

Mr. Weinstein is a former investment banker and law school dropout that fell into the restaurant business after a partner became ill and he had to take over. This means that this is a different looking company than many in the restaurant business, one that thinks about the balance sheet first.

This is encouraging to me as an investor.

Another point that I want to note that the company is currently researching another acquisition now that the balance sheet is in check. Mr. Weinstein noted that they are looking for “…something that's worthwhile looking at. The minimum threshold is we don't want to do anything with the cash flow generated by operations is less than a million dollars. They have to be well established restaurants…Seriously looking right now at one possibility and yes, it will come as 3 time, 4 times operating profit. There are others that we look at that are little more expensive than that, I don't think we want to reach beyond 3 times or 4 times.”

Ark has done well so far with acquisitions and keeping the key management in place after acquiring restaurants. This, again, is something that I am looking for, a company that is a good serial acquirer not a major disruptor for the sake of disruption.

Finally, there is a huge wild card that could have a substantial impact on the future profitability of Ark. That is the building of a Meadowlands Casino. There are rumors that Meadowlands, NJ will obtain a casino license in the next few years. This matters for Ark because they currently have exclusive rights to all food and beverage operations at a casino in Meadowlands, with the exception of one Hard Rock Cafe in a Hard Rock Casino. This, though, could end up with a buyout of those rights over them actually operating the facilities. That would not be as advantageous but either way is a step forward in enterprise value.

So What Now?

In my perspective things are looking up for Ark Restaurants, Corp. Getting through the pandemic and placing themselves with a strong balance sheet gives me confidence in the management that is running the ship. While there are still many headwinds to face, such as rising prices, lack of staffing, and a potential incoming recession, I still feel confident that those pulling the strings will continue to manage these issues accordingly.

The current price at writing of $21.75 seems to be hovering right around my projected fair value, but there may be significant more upside. If the PE or P/FCF grows towards industry norms, the company could very well be ~ 50% undervalued. Add to this that the company currently has a market cap under $100 million and institutions hold only ~15% of the outstanding shares and this could be in line soon for significant future investments by funds.

What does it all mean then? It means that I will most likely add a small position to the portfolio soon.

The last thing that I will leave you with is this picture of the most recent insider buying.

As always, thanks for reading and happy investing!
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