I have been chiding Burt Vivian about his sourpuss attitude when speaking to the street. Right now, few restaurant companies are "kicking ass" so there is part of Burt's commentary that is born out of the reality of today's economic climate. But anyone who has heard him recently knows that he takes cautious commentary to a whole different level than other restaurant industry executives.
Is his overly cautious tone having an impact on the stock? It sure looks like it!
I have been cautious on the casual dining names for the better part of a month as we head into 2Q09, with many companies facing stimulus headwinds. While the group has been churning in a tight range, I'm less convinced there is any real reason for them to go down.
I'm now becoming a bigger believer that for most restaurant companies, the top line is not that relevant - to a point. In 2Q09, if a company misses top line expectations, but can beat earnings by a significant margin, the stock is not going down. Even on a lower sales base operating margins are rising, which implies that cash is growing. The mature casual dining companies that have whittled growth capital to a minimum are gushing cash! On this basis the stocks are cheap!
The mature casual dining names always seem to move in a pack and there rarely is there a "best in class" company. For years, it seemed like PF Chang's (PFCB) and The Cheesecake Factory (CAKE) have been on the same trajectory. Both companies have been living the same life cycle and benefiting from the same industry trends. Still today the companies seem to parallel each other, yet a significant discrepancy exists that is not easy to reconcile and definitely worth a closer look.
I'm not sure a pair trading these two will work on the margin; they're either both going to keep working higher or they both won't. The Research Edge Quant model's set up is bullish for both companies, not including the short interest factor. The short interest factor is off the charts for PFCB!
The set ups look like PFCB is trading at 6.1x EV/EBITDA versus CAKE at 7.9x. The short interest for PFCB is an astounding 40.1% and only 14% for CAKE. The consensus has voted and PFCB is going down hard! I'm not convinced that there is a smoking gun at PFCB. For every improvement in PFCB's cash flow multiple is $5.66 of upside.
While still relatively small in size, PFCB is a mature restaurant company throwing off lots of cash. Like many restaurant companies, the slower, more controlled growth is having a significant impact on the company's financials. I have always used a company's return on incremental capital as an initial screen to understand where the company is going with its cash. Is a company reinvesting its cash to generate the best return for shareholders? On this metric PFCB is killing the competition.
Both concepts experienced a nice improvement in 2-year same-store sales trends in 1Q09 with PFCB having seen slightly better earnings revisions over the past three months at 35% (25% for CAKE). Both companies run the risk of a sequential deceleration in same store sales trends, but I don't think that really matters for either company. Margins are improving on the back of cost cuts, pricing and lower inflation. My model is coming up with estimates for 2Q09 and for FY2009 that are significantly better that consensus estimates.
Where is the negative catalyst? Or is Burt to blame for the discount valuation?
What do you think the shorts are going to do when Burt Vivian gets up in front of the investment community and his sourpuss face is gone?
