With only one sell-side analyst, according to Bloomberg, advising clients to sell BJ’s Restaurants’ stock at this price, and the eye-catching underperformance versus the S&P 500, it is tempting to get on board with BJRI. At this point, we intend on waiting until after the 1Q13 print on 4/26, at the earliest.
Reasonable Expectations
One of the major reasons why BJRI is tempting on the long side is that expectations seem reasonable. In fact, at $1.25, we are ahead of the Street’s FY13 EPS estimate of $1.22. That said, our confidence in our estimate is not as firm as we would like and we are not overly confident that the market will take “beats” versus consensus as a reason to bid up the stock significantly. We are waiting on the 1Q print and any sign that returns are sequentially accelerating. We expect returns to improve throughout the year, but not soon enough that we would rush to buy the stock.
Returns, Returns, Returns
Return on Incremental Invested Capital has been key to the share price of this, and many other restaurant companies. Empirically, this has proven to be especially true of growth stocks. Until we become confident that management is seeing stable returns on incremental invested capital, we’ll be advising our clients to be patient.
Traffic
Same-restaurant sales growth has been erratic over the past year, missing expectations in two quarters during 2012. The company’s Gap-to-Knapp has come in drastically over the last few years and this has pressured returns. In 1Q, we will be waiting to see a strong recovery in traffic trends, sequentially, on a two-year average basis, to gain the necessary confidence to get behind this name. If traffic trends don’t recover, it will be difficult for the investment community to consider this a growth stock and we expect the multiple will remain in the 8-10x EV/EBITDA range.
Howard Penney
Managing Director
Rory Green
Senior Analyst
