Stakes are high for Morton’s

The recession is taking a bite out of Morton’s Restaurant Group Inc.’s business and stock price.

Business travelers, who account for a significant portion of the restaurant group’s patronage, are staying away from the company’s steakhouse restaurants, where steaks range in price from $37.50 to $57 and a side dish from $8 to $10.50. The company has expanded its customer base and maintained crucial market share by relying on an in-house trendy bar area and dining room and bar promotions.

Cowen and Co. LLC analyst Paul Westra said Morton’s is moving in the right direction by introducing new promotions and extending old ones.

“Morton’s, I think, is very smartly evolving a little bit more,” he said. “The environment isn’t completely cigars and Sinatra. They can skew a little bit more toward Ruth Chris … but still be the only business-centric steakhouse out there, and that’s a nice place to be. They own the sandbox.”

Morton’s stock closed Tuesday at $3.74, just a few dollars above its 52-week low of $1.42 reached on Feb. 3 and less than half of its 52-week high of $8.31 reached on June 5. Analysts and shareholders said it will take an increase in corporate travel budgets, plus an overall turnaround of the economy, to get Morton’s stock moving again. Four of seven analysts polled by Bloomberg LP have a 52-week price target consensus of $5.

Morton’s stock is “one of a few hundred, if not a thousand” companies hurt when the recession began to take hold in early 2008, said Alan Parsow, a fund manager with Elkhorn, Neb.-based Elkhorn Partners Ltd. Partnership.

“The extreme pessimism was so low that they were giving these [stocks] away,” said Parsow, whose fund holds 47,200 shares of Morton’s stock according to Bloomberg. “They all got down to well below what the intrinsic value of the corporation was.”

Morton’s stock is inexpensive because of an economy full of skittish investors, Westra said. He doesn’t have a specific 52-week price target but expects the stock to increase a minimum of 10 percent over the next 12 months. He estimates Morton’s will earn 20 cents per diluted share in fiscal 2009 and 35 cents per diluted share in 2010.

“It’s hard to judge when the timing will be of any [economic] recovery, but we think that the valuation is worth the investment,” he said. “Intuition would tell you that ‘Hey, long term, Morton’s is not going away.’”

Morton’s is succeeding in navigating the current economic environment by “going on the offense” and reaching out to potential customers through promotions, something the company typically avoids, Westra said.

Not surprisingly, Morton’s isn’t sitting on the sidelines and waiting for the economy and foot traffic to improve. It aims to attract a non-traditional clientele base and boost revenues by offering promotions in its upscale, in-house Bar 12-21. The bar area has already proven its worth as newer Morton’s restaurants built with it have posted revenues that are 15 percent higher than older restaurants that weren’t built with the bar, Morton’s executives said in a first-quarter earnings call in early May.

Bar regular Bill Ruiz, said recently that he’s noticed attendance dwindling at Bar 12-21 at the East Wacker Place location due to the recession, but he noted that Morton’s problems aren’t unique.

“There’s going to be people who are going to cut back, but I think it’s doing better than most other restaurants of this type,” said Ruiz, who owns a breakfast restaurant around the corner.

Morton’s Chief Executive Officer Thomas Baldwin said in a recent interview that Bar 12-21 is an important strategy for combating a bad economy, noting that the normally 60 percent male clientele base tends to be more balanced between men and women during promotion hours. The bar menu includes “value-based” items such as bite-sized filet mignon sandwiches and special prices on wine and beer. These promotions help create what Baldwin called a “high energy environment” on par with other bars catering to an upscale clientele.

“Obviously the recession impacts everyone and we recognize that,” Baldwin said. “We’ve been in part impacted in reduced business travel in the convention cities … what we’ve tried to do is drive guest frequency.”

In other efforts to grow, Morton’s opened a restaurant in Mexico City in March, released a cookbook last month and extended the decade-old summer steak and seafood promotion program until the end of this year. The latter, Baldwin said, may not be continued year-round in 2010 if economic conditions improve.

“It will probably run every summer, and we’ll see about the other times of the year,” he said.

Sidoti and Co. LLC analyst Michael Podhorzer has a 52-week price target for Morton’s of $7, and he estimates the company will earn 53 cents per diluted share in 2010. Podhorzer said the financial health of the company is improving, and he expects Morton’s to report positive free cash flow in 2010. He also likes Morton’s willingness to adapt.

“It’s tough for them to really have an influence on their stock price,” Podhorzer said. “Basically they’re just running the business and not worrying about their stock price, buying back debt and strengthening their balance sheet at this point. It’s all they can do.”

Podhorzer said touting Bar 12-21 is a wise choice to drive revenue.

“It used to be a holding area,” Podhorzer said of the pre-Bar 12-21 space at Morton’s. “Now it’s a destination.”