Ruth's Hospitality Group Inc. (NASDAQ: RUTH) is the largest fine-dining steak house in the U.S. Ruth's currently has 145 restaurants globally, 66 company-owned and 79 franchisee-owned units.

The stock price has risen steadily since November 2014, when Ruth's sold the Mitchell's Restaurants (21 high-end) to Landry's, Inc. for $10M. The company has since shifted its focus from a diversified portfolio to a single-brand concept, Ruth's Chris Steak House, for long term organic growth. Ruth's Hospitality is revamping their restaurants to attract the next generation while retaining their current high-end customers simultaneously. Year to date, the revenue stream indicates a positive trend.

Q3 2015 Highlights

2015 has been a good year for the firm, and in turn, the stock. Ruth's total revenue grew 8.8% Y/Y to $80.3M in the third quarter, driven by new store openings and same-store growth. Income from continuing operations increased 20% to $2.6M.

Additionally, same-store sales growth increased 3.3%. This growth stemmed from a 3.8% average check increase, partially offset by an increase in beef cost. Store traffic was down 50 basis points Y/Y, particularly in high-tourism regions. Marketing expenses increased to 2.9% for planned advertising spending, a typical sign of a revamping firm.

Ruth's has boosted their shareholder's confidence throughout the year. Since the beginning of 2015, the company has repurchased 752,438 shares for $11.7M under the company's previously announced $50M repurchase program (most recently 401,689 shares at an average price of $15.93). Ruth's dividend has also increased 20% in the last year.

Ruth's 2.0 Looks Well Done

Ruth's Hospitality Group created an initiative plan, Ruth's 2.0, to revamp its restaurants with a menu refresh program, new modern design, an expanded bar, and enhanced private dining spaces. The company debuted a new happy hour program to encourage people to visit more frequently. It features a different menu and new twists on classic cocktails. Ruth's also completed two remodels by the end of third quarter. It is expected the full remodel program should be completed in three to five years. Two company-owned and one franchisee-owned restaurant will be opening in the fourth quarter of this year and three more restaurants are expected to open in the early half of 2016.

Also, the management has created a culture conducive to growth. The company has offered excellent training and leadership development programs. Ruth's was named No.1 of 172 restaurants in the 2015 annual Consumer Picks survey.

Liquidity Could Become an Issue

In the third quarter, the company received $7.7M cash flow from operating activities and spent $6.5M for capital expenditures. The company used the remaining $1.2M cash plus $5M in long term debt to total $6.3M to repurchase the 402,000 shares of common stock. The balance sheet included $29M current assets and $59M current liabilities resulting in a current ratio of 0.49. These conditions might cause a tightening of the company's cash flow position when the next market downturn comes.

Ruth's A Solid Play for Long Term Growth

With a $562M market cap, Ruth's is slightly overvalued at $17.03 per share, with a P/B around 5.5, P/E 18.5, P/S 1.5 and P/Cash Flow 9.3. The fine-dining segment is a small portion of the restaurants industry, accounting for less than 15% of the industry's total revenue. It is particularly vulnerable to the fluctuation in market conditions. During the 2008 recession, Ruth's stock had ratios of P/B 0.9, P/S 0.1 and P/Cash Flow 0.9. However, it looks to be a good long term steady growth candidate. Wait until next downturn to trigger a buy position when its key ratios hit the undervalued range.