Times are tough but worse for Ruth's Chris and Morton's

Think your stocks are doing bad?  Try the best steakhouses in the country, in the last year Ruth's Hospitality Group, Inc. (NASDAQ:RUTH) shares have fallen 70% and Morton's Restaurant Group, Inc. (NYSE:MRT) is down 64%. 

Beef.  It's what people don't want to pay for when out for dinner.

McCormick & Schmick's Seafood Restaurant (NASDAQ:MSSR) is down 65% in the last year, and  those guys are famous for seafood, guess the steak sales suck there too.

Restaurants in general are feeling the pinch from the struggling U.S. consumer, all but McDonalds (NYSE:MCD), but then again, they do have a dollar menu.  People don't want to pay for lattes at Starbucks (SBUX) and we all read enough about that this week (hello $15 a share) - Prepare to read 500 articles about Starbucks (SBUX) today.

Common sense: If the economy is doing bad, the steakhouses are doing worse.  When they start to improve, so will your precious portfolio.

Okay smart guy, so when will that be?

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Nobody knows, and what makes the situation worse is the talking heads and constant media attention sending mixed messages on a daily basis.  The Market is recovering.  The DOW will go to 10,000.  Unemployment isn't bad.  Unemployment is bad.  CNBC says short the market.  The list is endless...

When will the DOW stop going down?

Last month, Piper Jaffray downgraded Ruth's Hospitality Group (RUTH) from Neutral to Sell and lowered its price target from $8 to $5.

The firm believes that Ruth's "could potentially break its debt covenant in FY08" given its current debt/EBITDA ratio of about 4x. If this assumption comes true, Piper believes Ruth's "would be forced to modify its debt agreement, most likely resulting in a higher interest rate and a one time fee for breaching the agreement, which would negatively impact earnings."

Piper points out that management has responded to these claims by saying that "'add-backs' to EBITDA associated with the Mitchell's acquisition provide enough cushion to satisfy debt requirements for the remainder of the year."

But not every analyst hates the steakhouses, Ann Northrop from Zacks.com on July 1st said as the economy improves in the late 2009-2010 time frame, Morton's can grow earnings at a Compound Annual Growth Rate of 10% to 13% by adding new units and growing same-store sales through increased boardroom utilization, and modest price increases.

2009 to 2010, that's a fun wait.

The restaurant industry's profits are suffering from higher costs and declining traffic, and Morton's is no exception. The steakhouses extreme reliance on corporate spending and moderate financial leverage will work in reverse as the economy slows down. At this point, visibility to the second half of 2008 and 2009 earnings is murky and Zacks.com thinks the risk/reward is not favorable.

More from Zacks.com:

Roughly, 80% of Morton's customers are business people dining on expense accounts. In an effort to boost comps, and broaden its customer base outside business clientele, Morton's is remodeling its bars, now called Bar 12-21, to attract new customers  who might not ordinarily eat at a high-end steakhouse but if impressed, may return and dine at the restaurant. We imagine the management will also boost its marketing initiatives to drive traffic further.

Morton's shares trade at a discount to competing upscale steak and seafood chains, despite returns that are in line to superior than many of its competitors. In the last economic downturn, Morton's was hit harder than many of its competitors, owing to shriveling sales and high debt levels. In addition, private equity firms still hold 36% of Morton's shares, and we think their eventual selling may pressure the stock. Therefore, at this level, we believe shares of Morton's are fairly valued, and should perform in line with the market. Our six-month target price is $7.

Moral of the story, these stocks aren't going to turn around any time soon, and should the DOW continue to fall, Morton's and Ruth will see new 52-week lows.

Hungry for steak now?

Disclaimer: No positions in RUTH or MRT