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We added The Cheesecake Factory (CAKE) to our Best Ideas list on 01/16/2014 at $47.51/share.  Since this time, 2014 EPS estimates have been revised down approximately $0.10 from $2.38 to $2.28, but the share price has been resilient (down ~1%).  The S&P 500 is up ~6% over this time.  With this note we are removing Short CAKE from our Best Ideas list.

CAKE was intended to be an intermediate-term short call, hinged on our expectation for a disappointing 1Q14.  This came to fruition, as notable margin pressure manifested in a $0.06 earnings miss.  In fact, we even got the full-year guide down we were looking for (FY14 EPS $2.24-2.33 from prior $2.29-2.41) but the stock’s resistance to follow suit has been discouraging.  Six consecutive quarters of declining traffic continues to be concerning, but this appears to be the new norm in casual dining.

At 8.85x EV/EBITDA (NTM) and 19.59x P/EPS (NTM), the stock screens quite attractively relative to other casual dining companies.  Given the company’s superior same-store sales and revised FY14 estimates that appear achievable, we can no longer recommend it as a high conviction short.  We wish the stock followed the fundamentals more closely to-date, but hope is not an investment process.

On to the next one.

CAKE: Closing Best Idea Short - chart1

Research Recap:

New Best Idea: Short Cake (01/16/2014)

CAKE: Risk Profile Rising (01/17/2014)

CAKE: Operational Observations (01/21/2014)

CAKE: Dairy Prices Rising (01/29/2014)

CAKE: Thin Batter (02/13/2014)

CAKE: Still Short (04/24/2014)

Howard Penney

Managing Director

Fred Masotta