It is safe to say that Ruby Tuesday, Inc. (NYSE:RT) has disappointed so far this year. To date, the stock is down 3.5%, 23% from its 52-week high and underperforming the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) by nearly 30%. Moreover, the company has not been profitable for the last two years. Nonetheless, I believe that Ruby looks to be a perfect turn-around play.

Ruby Tuesday

Ruby Tuesday’s losses going down

Firstly, Ruby Tuesday, Inc. (NYSE:RT)’s losses during the past two years have been down to several non-cash goodwill impairment charges, as the company has taken write-downs on several acquisitions it has made over the years. These write-downs now mean that goodwill on the balance sheet stand at zero, removing some future uncertainty.

Still, according to GAAP rules, Ruby has been forced to report a cumulative three-year pre-tax loss due to the effect of these non-cash charges.

However, Ruby Tuesday, Inc. (NYSE:RT) is working hard to get itself back on track and return to profitability.

Management trying to unlock share value

Ruby Tuesday, Inc. (NYSE:RT)’s management has been trying to undo some mistakes of the past and currently this is impacting performance. Nonetheless, over the longer term, these changes should unlock value.

Indeed, Ruby Tuesday, Inc. (NYSE:RT)’s sales fell by 4.6% year-on-year at the end of the second quarter as the company closed eight underperforming restaurants. Same-store sales declined 1%. Operating margins also fell 2.6% year-on-year as the company discounted heavily in an attempt to try and attract customers.

However, the closure of these eight stores allowed Ruby Tuesday, Inc. (NYSE:RT) to pay off some corporate debt, as the company has historically purchased its stores outright rather than leasing. Year-on-year, Ruby’s cash balance expanded 10%, net book debt fell 8.5% and the company paid off some expensive mortgage debt in the quarter resulting in lower interest costs. Management expects to generate $10 – $15 million in cash from the sale of real estate through 2014, $6 million of which will be spent on cost saving initiatives throughout the business.

Ruby Tuesday’s cash generation

Excluding the effects of financing items on cash flow (operating cash flow-investing cash flow) over the last 12 months, Ruby Tuesday, Inc. (NYSE:RT) has produced a cash inflow of $58 million, or roughly $0.95 per share. On trailing-12-month EBITDA of $97 million, this indicates a cash conversion ratio of slightly less than 60%.

Using this method to value Ruby Tuesday, Inc. (NYSE:RT) against its sector peers, we get an interesting result. The Wendy’s Co (NASDAQ:WEN)’s is the largest company in the restaurant sector. During the last 12 months, Wendy’s generated $62 million in cash, excluding financing activities. On a per-share basis, this is worth around $0.16, or a price-to-cash-flow ratio of 53.5. In comparison, Ruby trades at a price-to-cash-flow per share ratio of only 8.1.

Comparison of Wendy’s and Ruby

Moreover, if we take The Wendy’s Co (NASDAQ:WEN)’s trailing-12-month EBITDA of $356 million, we find that the company’s cash conversion ratio is only 17%, less than one-third of Ruby’s. So, all in all on a cash-generation basis, Ruby looks cheap.

In addition, on a price-to-book basis Ruby Tuesday, Inc. (NYSE:RT)’s also looks cheap. The company has a relatively clean balance sheet with $1 billion in assets, $500 million in liabilities, and approximately $500 in shareholder equity. Overall, Ruby’s has a tangible assets value of $8.4 per share.

All in all, Ruby Tuesday is a turnaround play that looks cheap on several metrics. The company’s cash generation is highly impressive and management’s reorganization program looks like it will unlock long-term value for the company.