Red Robin Gourmet Burgers, Inc. (RRGB) operates bargain to medium priced full service restaurants, and as of September 30, 2012, the company had 336 company-owned restaurants in 32 states, and this number includes five Red Robin's Burger Works, a non-traditional prototype with a limited menu. In addition to company-owned stores, the company does franchise some restaurants, and at the end of its third quarter, there were 132 franchised stores in 21 states and two Canadian provinces. The company should achieve a long-term earnings growth rate in the low to mid-teens, based on its competitive edge of providing excellent food and service, and in view of these considerations, I believe this stock is an attractive value relative to the overall market.
With its 470 restaurants, the company should achieve my 2013 revenue estimate of $1.01 billion, and my 2013 earnings per share estimate of $2.00E. Currently Red Robin's stock is trading at about $37.43, trending up about 20.9% over the last 52 weeks, and moving ahead of its 100-Day Moving Average of about $32.8. Assuming that the stock could potentially trade at a multiple of 30.5X, or the same multiple as Starbucks (SBUX), this would indicate a target price for Red Robin of $61 per share.
Alternatively, if you assume a trailing twelve months net free cash flow per share of about $2.78, which is operating cash flow minus investments, and were to use my estimate of the company's cost of equity capital of 18.13%, and then plug in a growth rate projected at 13.77% from Yahoo Finance, you could use the Dividend Discount Model to estimate a target price of about $63.76. ($63.76 = $2.78/(18.13%-13.77%); and 18.13% = K = 2% + (9.6%)*1.68; where 2% would be the risk-free interest rate; 9.6% is my guess of the market risk premium; and 1.68 is Red Robin's Beta from Yahoo Finance.)
Using other valuation barometers, Red Robin's price/book ratio and P/E to growth ratio are, respectively, about 1.72X and 1.42X, which is slightly above the average P/E to growth ratio for the restaurant industry of about 1.35X (from Yahoo Finance). The company's price/sales ratio is about 0.56X, which is significantly less than the industry average price/sales ratio of about 1.31X (from Yahoo Finance).
Finally, there is no substitute for old fashioned shoe leather: I ate lunch at Red Robin this week. Based on what I could observe, the quality of the food and service are excellent. I plan to return for Happy Hour.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.