Can we have our cake and eat it? ;)
Key Stats for Cheesecake Factory
| Ticker | CAKE |
|---|---|
| Sector | Commercial Food Services |
| Latest price | $49.80 |
| Value | $2,389M |
| Daily vol | $83M |
| Date | 22 June 2017 |
| Links | SEC Edgar, thecheesecakefactory.com |
1. What's cooking?
Well CAKE is more than a bakery... it's really a restaurant chain. And in the US they've over 200 locations in the US, with no franchises. Though there are a dozen, licenced operations in Asia, the Middle East & Mexico. And the soon they'll have their first Canadian restaurant. Again, owned, not a franchise.
They've 3 brands, with nearly 200 Cheesecake Factories, a dozen Grand Lux Cafes and one brand new, the RockSugar Southeast Asian Kitchen in Los Angeles. (Anyone been?). And beyond this they've made an investment in two other brands (North Italia and Flower Child) which they can take control of in the next three to five years if they are a success.
Now the food business is pretty competitive and consumers are fickle, so what's their take on "casual dining"?
In contrast to many restaurant chains, substantially all of our menu items, except those desserts produced at our bakery facilities, are prepared from scratch at our restaurants with high quality, fresh ingredients using innovative and proprietary recipes.
and
We place significant emphasis on the contemporary interior design and décor of our restaurants, which create a high energy ambiance in a casual setting and contribute to the distinctive dining experience enjoyed by our customers. Our restaurants ... require a higher investment per square foot than is typical for the casual dining industry.
So... be unique ... fresh ... and high end. Yeah... why have a simple cake when you can have cheesecake, eh?
kaching?
The top line's been steadily growing and the bottom line's been doing well, though that's boosted by share buybacks.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Revenue | $1.8bn | $1.9bn | $2.0bn | $2.1bn | $2.3bn |
| EPS | $1.78 | $2.10 | $1.96 | $2.30 | $2.83 |
It's hard to not like a steady grower. Though we need to remember that part of this is expansion, not increased sales in each restaurant. There's nothing wrong with expansion, and comparable sales look like they are keeping pace with inflation.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Cheesecake Factories | 162 | 168 | 177 | 187 | 194 |
| comparable sales | 2% | 1% | 2% | 3% | 1% |
They happily pay dividends and buybacks, so the cashflow is coming back to shareholders too.
And it doesn't feel like the expansion is debt fueled / dangerous. In fact, I wonder if they could be more aggressive? Note: they've actually got cash on the books, not debt.
2. Let them eat bread or muffins?
Clearly the coffee and donut industries are better margins and returns. With CAKE in the same group a Panera, Darden and Cracker Barrel.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Cheesecake Factory Inc | $2,285M | 13% | 23% |
| Starbucks Corporation | $21,976M | 23% | 55% |
| Darden Restaurants, Inc. | $7,026M | 14% | 26% |
| Domino's Pizza, Inc. | $2,558M | 20% | N/A |
| Panera Bread Co | $2,838M | 15% | 44% |
| Dunkin Brands Group Inc | $830M | 54% | N/A |
| Cracker Barrel Old Country Store, Inc. | $2,929M | 13% | 34% |
But what looks odd, is that CAKE's expected to have double digit growth, high cash flow yield but it's valuation is at a discount to the rest of the peers. Imagine... even a discount to good ol' CBRL.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| CAKE.O | $2,389M | 17x | 11% | 2% | 11% |
| SBUX.O | $86,828M | 28x | 15% | 2% | 6% |
| DRI | $10,977M | 22x | 12% | 3% | 9% |
| DPZ | $10,392M | 40x | 18% | 1% | 3% |
| PNRA.O | $7,147M | 41x | 17% | 0% | 4% |
| DNKN.O | $5,021M | 22x | 13% | 2% | 7% |
| CBRL.O | $3,905M | 20x | 8% | 5% | 10% |
So what the heck's wrong with cake, I ask you?
3. Who's cheese intolerant?
So the professionals on Wall Street think the stock's a hold. Though the brokers ain't had a buy on the stock since July last year, when the price wasn't far from today's level.
And that hold looks a little odd, given their target of $58 a share is nearly 20% higher than the current price. It's as if the recent price decline has been ignored.
And today, at 17 times forecast earnings, CAKE is at the bottom of it's 2 year range of 17 to 25x earnings.
Though perhaps Wall Street's got indigestion. After beating earnings 8 quarters in a row, we've seen one miss and a downgrade to expectations. In fact, 2017 is now expected to be a flat year, at the top line and the bottom. :(
4. the long and the short of it?
So, short term, brokers and traders aren't interested in CAKE. And it feels like there could be a few more dollars sliced off the price.
But long-term, management seems to be making smart investments on new locations and brands, and in every case growing the cashflows, without having to expand the capital base much. i.e. returns are good :)
It's not oversold yet. But even before then, I gotta say, I'm liking this CAKE, long-term. ;)
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author:
- u/shane_stockflare
- Shane Leonard, CFA
Submitted June 22, 2017 at 05:57PM by shane_stockflare http://ift.tt/2sWkBeK
