Stock Interest List Update

It looks as though I was beaten to the punch on this idea. Last Friday none other than CNBC's own Mr. Jim Crammer said CKE Restaurants Inc. (ticker: CKR) despite being "worst of breed" has the most upside in an improving market. Unfortunately, I was unable to post this last week ahead of him.

Well, like any true deep value stock, CKR is beaten down for a number of reasons. If the Company is able to see its way through the prior mess it created for itself, there is potential 25% upside on top of the 14% "Crammer gain" seen today.

CKR is a quick serve restaurant (QSR) chain that owns the Hardees and Carl's Jr. brands. The current management team came in 2001 to turnaround the Hardee’s brand, which had been bought from a Canadian Company in 1997 – apparently Hardee’s had been under invested in and was a deteriorating brand. By year end FY09 179 Hardee’s out of 482 company owned restaurants will be left to remodel. Management believes the remodel portion of its turnaround is close to complete and it can now focus on growth at the Hardee’s brand. Furthermore, same store sales (SSS) and average unit volumes (AUV) have been strong at Hardee’s but SSS pressured at Carl’s due to CA exposure. The Company is trying to combat this with aggressive Texas expansion and offering breakfast at Carl’s. (Note: Mr. Crammer did say he believed the decline in CA is turning around.)

CKR believes it can bring Hardee’s operating margin to Carl’s if it increases the AUV, and that management is actively focused on trying to do this. The Company recently held a corporate retreat in Vegas and Hardee’s franchisees were excited about the revitalization and the margins that CKR restaurants offer compared to comps – 30% of the store base is Company owned, which the Company considers a competitive advantage because it is vested in making the restaurant as profitable as possible for the franchisee.

My bottom line is that even despite 61% of Carl’s Jr. restaurants (about 20% of total Company) being located in California, the Company managed a decent comp of (1.3%) YTD as of April 20, 2009, and even in such a disastrous environment CKR has room for both margin and store expansion. CKR looks for 4.9% annual unit growth for the next five years and International franchise expansion is part of the Company's growth strategy - planned to account for 19% of overall unit count by FY14 compared to 10% today. On a low relative valuation to peers, I like the stock to advance a potential 25% from here and I am placing it on the Buy Interest List.

Besides any clear caveats about the consumer and potential risk that the Company needs to offer discounts in the future, etc., I would also point out that one might get a better price for the shares by waiting for the "Crammer exuberance" to die down a bit.

-2outof4