One of The Fool's best known investors has taken a shine to Prezzo.
One of Peter Lynch's main investing tenets is to buy what you know; what you see around you and understand.
In his book "One Up On Wall Street" the fictional couple, Mr & Mrs Houndstooth have differing views on investments. The family "expert" on investing, Harry Houndstooth, continually buys the "next big thing" after it has already risen sharply in price.
His wife Henrietta (a.k.a. "the person who doesn't understand the serious business of money"), meanwhile, spots her investment opportunities whilst out shopping. These are generally derided by her husband until such time as they've risen sharply enough for him to take it seriously -- always too late of course. Anyway, you get the picture.
Now I haven't come across any Prezzo (LSE: PRZ) restaurants on my travels, but the eponymous landlord of The Fool's "Paulypilot's Pub - Share Ideas" discussion board has, and he likes them; as an investment at least. And any investment the landlord likes is worth looking at.
The attraction
So what's the attraction?
Well Henrietta Houndstooth may buy shares in something like this because she spots a new restaurant chain that's beginning to roll-out, and she likes it as it's a bit different in some way to what already exists. And on this basis, the landlord likes them too, saying "their point of difference is that they spend a lot more money on the fit-out than most restaurant chains, so whilst the menu is very familiar to everyone, it's presented in more stylish surroundings".
This seems to be confirmed by the company's straightforward premise; "We believe in serving superb Italian food in a friendly, relaxed environment which offers great value for money".
Contrarian appeal
There's also a contrarian element to investing in Prezzo today in that the shares have fallen sharply from their high of 93.75p over two years ago. This is no surprise. The economic world of summer 2007 was a very different one from today. The shares now stand at 29.75p at which price Prezzo is valued a touch over £68m. In return for this, investors buy a share in 137 restaurants and overall net tangible assets of over £55m at the last count at the end of June.
The basic investment case is the solid balance sheet and the potential roll-out as the chain is successful and expands gradually funded by reinvested profits rather than debt. Consensus broker forecasts are for earnings of 2.87p this year falling to 2.75p next, placing the shares on a forward price-to-earnings ratio of a little under 11. But a successful roll-out funded from profits is longer term stuff.
The Kaye family, who own over half the company, have a successful track record in similar roll-outs. They tried to take the restaurant chain private last year. This majority shareholding has plus and minus points; they're far likelier to have the interests of the company at heart, but then it's more difficult for a predator to take it over.
Timing
The problem with investing in Prezzo today is one of timing. This is always the difficulty with any contrarian investment. With interest rates at their lowest ever level and the pound weakening (causing imports to be dearer), the fear is that inflation will kick in, causing the Bank of England to raise rates, and discretionary spending on things like eating out to be cut.
However, some restaurants do well during recessions as people still want to eat out, but are a little more cost-conscious when they do so. And Prezzo does offer value meals, offering two-course lunches for £7.95 for example.
We've already been through a time of great pessimism during which Prezzo has undoubtedly suffered, but its performance was excellent given the circumstances. If it can do this well in the lean times when its rivals are going to the wall, what will the next five years or so bring? It looks an interesting investment to me on a long-term basis.
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