Hot Dog! Nathan's is up 40%!July 2, 2012: 9:44 AM ET
When you think about the 4th of July, fireworks, backyard barbecues and Tchaikovsky's "1812 Overture" (music with cannons!) probably come to mind. And thanks largely to ESPN, the gluttonous International Hot Dog Eating Contest down in Brooklyn's Coney Island has also become a national Independence Day tradition.
The contest has been going on since 1916 at the Nathan's Famous hot dog stand at the corner of Surf and Stillwell Avenues -- go Brooklyn Cyclones! -- and has been aired live on Disney (DIS)-owned ESPN since 2004. (It's on tape delay this year though due to something called Wimbledon taking precedence.) Despite the revolting images of grown men and women stuffing tube steaks into their mouths as fast as they can, this is arguably great PR for Nathan's, which has 304 locations around the world.
You might be surprised to know that Nathan's (NATH) is publicly traded. So this event is also a great chance to look at the stock. And guess what? Nathan's has been a huge "wiener" (sorry!) this year.
Shares are up more than 40%! To put that in perspective, Nathan's has outperformed 482 of the stocks in the S&P 500, including momentum studs like eBay (EBAY), Salesforce.com (CRM) and Whole Foods (WFM). And it is only trailing Apple's (AAPL) year-to-date return by a few percentage points.
Why has Nathan's done so well? Simply put, people are eating a lot of hot dogs. The company reported in early June that revenue for its most recent fiscal year (which ended in March) was up nearly 16% from a year earlier. And earnings per share more than tripled.
But the bulk of the growth is not with the actual restaurants, of which only 5 are owned by the company. The rest are franchised and Nathan's gets royalties and fees from them.
Nathan's generates most of its sales from what it calls its Branded Product Program, which allows other foodservice providers at places like sports stadiums, casinos, movie theaters and retailers such as Sears (SHLD)-owned Kmart to sell hot dogs, crinkle-cut french fries and other Nathan's-branded goodies on their menu. That business accounted for nearly 60% of sales in the most recent fiscal year. And sales rose more than 26%.
Still, this is a risky stock. The company said in its most recent annual report with the SEC that 42% of its Branded Product Program's business comes from just 6 accounts, and added that the contracts with these customers are "relatively short-term."
The company has also been involved in a lengthy legal battle with its main supplier, SMG, over sales of Nathan's seasonings to SMG. A court has ruled in favor of SMG, which means Nathan's could owe SMG nearly $5 million in damages. That's a lot of mustard for a company that only earned about $6.2 million in profit last year. Nathan's is appealing the case. In addition, Nathan's is seeking to terminate its licensing agreement with SMG before the deal ends in 2014.
The market value for Nathan's is only about $128 million and the number of shares trading is tiny: the average daily volume over the past three months is just a little over 14,000 shares. Small companies with a limited amount of shares trading can tend to be extremely volatile.
What's more, only one analyst follows the stock, but there are no earnings or revenue estimates listed for the company. So it is impossible to judge the company on expectations of future growth. For what it's worth, Nathan's trades at 24 times actual fiscal 2012 earnings. That makes the company more expensive on a trailing basis than fast food giants McDonald's (MCD) and KFC/Pizza Hut/Taco Bell owner Yum! Brands (YUM).
Nonetheless, Nathan's has some impressive backers. Activist hedge fund Steel Partners (SPLP), Mario Gabelli's GAMCO and Dimensional Fund Advisors, the firm co-founded by David Booth, one of the pioneers of index investing, are big institutional owners of the stock.
And Nathan's huge jump this year is actually the continuation of a hot streak dating back to the end of the Great Recession and bear market. Since bottoming at about $11 in early 2009, the stock is up nearly 170% and shares have finished in the black for the past three years.
It probably helps that Nathan's has been aggressively buying back its own stock over the past few years. While that does nothing to help the actual business, reducing share count does boost earnings per share. It's also led some to speculate that management may want to take the whole company private some day.
So if watching Sonya "The Black Widow" Thomas and Joey Chestnut (alas, there is still a rift between the Major League Eating organization that sanctions the hot dog eating contest and the esophageally-gifted Takeru Kobayashi) try to repeat as chomping champions on Wednesday is part of your 4th of July plans, remember that Nathan's stock may add some relish to your portfolio too.