Analysts See U.S. Suit Against Karcher as Unlikely to Turn Off Most Shareholders

Karcher Enterprises was rocked last week by insider trading allegations, but analysts believe that most shareholders will be more interested in the fast-food chain’s return to profitability and how well a new roast beef sandwich sells.

The Securities and Exchange Commission filed an insider trading lawsuit last week against company founder Carl N. Karcher, 14 members of his family and a Karcher Enterprises employee.

The suit alleges that Karcher family members and the employee sold stock in 1984 after learning that the company would be announcing lower earnings, thus avoiding potential market losses of at least $310,000. Karcher and others involved in the suit have denied the SEC allegations.

Some Might Be Hesitant

The insider trading allegations might cause some shareholders to think twice about the Anaheim-based company, said William Tiritilli, an analyst at the brokerage firm of Rodman & Renshaw Inc. in Chicago. Tiritilli said investors might be hesitant to buy or hold shares if they believe that Karcher family members have an unfair advantage over other shareholders.

“For fence-sitters, those who aren’t sure whether they want to be in or out, this might cause them to get out,” Tiritilli said.

On Thursday, the day the SEC announced its lawsuit, Karcher stock dropped nearly $2 per share at one point before finishing the day at $15.50 per share, down 87.5 cents. The stock closed Friday at $15.50, down $1.50 for the week.

While analysts said the SEC suit may cause some shareholders concern, the future performance of Karcher stock will depend mainly on results of the firm’s operations. And the lawsuit isn’t expected to turn off Carl’s Jr. customers.

“People are trying to figure what this is going to do to operations. I think the answer is ‘not much,’ ” said Paul Salazar, an analyst at the brokerage firm of Crowell, Weedon & Co. in Los Angeles.

Needs Record Profits

But improving operations is going to be a challenge for the company, Salazar said. For the company’s stock to do well, Karcher Enterprises is going to have to produce financial numbers this year that are even better than last year’s record-breaking sales and profits.

Early last week, the company reported that it earned $16 million for fiscal 1988, which ended Jan. 25, on sales of $369.5 million.

Fiscal 1988 earnings reversed a $7.1-million year-earlier loss that was caused by over-aggressive expansion plans. The company cut its losses by selling off some of its restaurants and returning to a business strategy that emphasizes burgers, fries and soft drinks--at low prices.

While the fiscal 1988 performance was a company record, it didn’t surprise Wall Street, which months earlier had bid up the stock price in anticipation of a record year.

Wall Street also wasn’t surprised by Karcher’s announcement a week ago that it planned to buy 13 Los Angeles-area Wendy’s restaurants from a Wendy’s franchisee, and another announcement earlier in the month of plans to open Carl’s Jr. restaurants in Japan.

“I think a lot of people were selling last week on the good news,” said Gerald Orstman, an analyst at Thomson McKinnon Securities in New York.

Analysts expect the company to do even better this year. James Murren, an analyst at Cyrus J. Lawrence in New York, expects earnings of $1.70 per share, or $20.2 million for all 11.9 million shares outstanding. But meeting the expectations won’t be easy.

Sandwich Is Winner

Hamburgers are going to have to be big sellers, and recent menu additions will have to continue to sell well. Orstman said the company’s country-fried steak sandwich has become a winner, accounting for as much as 9% of sales at many restaurants.

And Orstman was optimistic about the prospects for a new roast beef sandwich that the company might begin selling systemwide later in the year.

Orstman said Carl’s Jr. will do well to stick to its back-to-the-basics approach and stay away from upscale items such as rainbow trout, which was a failure. But one analyst suggested that in the wake of last week’s allegations, Karcher, who is featured as the company’s main pitchman in television ads, should be dropped from the ad campaign.