McCormick & Schmick gets upgrade on valuation and buyout potential

Jennifer Schonberger | Jan 02, 2008 12:27pm EST | Comment

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McCormick & Schmick's Seafood Restaurants, Inc. (Nasdaq: MSSR) is getting a bit of a pop today after Morgan Joseph upgraded the sea food restaurant to “buy” from “hold” on discounted valuation and the potential for a private equity buyout.

Higher costs and a disappointing fourth quarter earnings announcement in late December, coupled with dubious sentiment surrounding consumer discretionary stocks, have been some of the reasons behind the recent sell off in the stock. Shares of the small cap have seen a 50% decline since September and a 25% decline since November; but Morgan Joseph analyst Dean Haskell says he thinks a buying opportunity exists.

“We believe this is an environmental hiccup for McCormick & Schmick's, not a fundamental one,” Haskell wrote in a research note today. “We continue to believe that the company's seafood niche strategy and 2x daily printed menu position it well for long-term growth, particularly as aging baby boomers seek healthier lifestyles in seafood options over red meats.”

The stock currently trades at 4.9 times the analyst’s 2008 earnings before interest and taxes, depreciation and amortization estimate of $37.8 million, giving the stock a price target of $16 per share. The small cap has a P/E of 12.9 compared with the industry’s P/E of 18.87.

Aside from a cheap valuation currently, Haskell says the company has the potential to be taken private even in a tough financing environment where buyout shops are scraping deals. According to the analyst, the company has historically taken itself private twice in the past decade.

In addition to a buyout track record, Haskell says the company’s operating fundamentals remain strong with a solid cash position and little debt on the balance sheet, creating positive interest.

“We believe McCormick & Schmick currently presents an excellent opportunity for private equity to buy it at a discount, particularly as the company continues to grow the concept with timely new unit construction,” wrote Haskell. He marks the odds of a buyout at 25%.

However, prospective investors should be prepared to sit tight for the first half of the year, as Haskell says the tough consumer environment characterized by weak casual dining sales seen in the latter half of 2007 is likely to continue until mid 2008 when the company might see relief.

Shares of McCormick & Schmick (MSSR) jumped 8.47%, or $1.01, to $12.94 at 12:13 p.m. ET. Shares of McCormick & Schmick have been trading in the range of $10.74 to $30.98 for the past 52 weeks.