Cheesecake Factory: Why Piper Jaffray's Downgrade Was Baseless

Piper Jaffray analyst Nicole Miller downgraded Cheesecake Factory (CAKE) to sell on February 13th fearing the company is losing market share, following the fourth quarter that was not so bad considering the economic meltdown we are experiencing, in my opinion, partially due to an inexperienced president.

CAKE has a P/E under 10 and still posted a profit of 9 million. This means they are still making money in this difficult environment which is impressive for any restaurant chain. Although same store sales are down over 7 percent, slowing sales are to be expected in the current environment.

The chain has 145 locations and plans to open possibly two more this year. Considering the chain has slowed to a more modest growth plan, sales will improve as we eventually start climbing out of the economic slump we are in by the end of the year. With over 80 million in cash on hand, CAKE would get through this year even if profit drops even further in the coming quarters.

This is a well run company that made it through rough patches before. The concept still stands out among casual dining and has become the model of perfection that other chains follow. In addition they are looking at opening smaller locations due to market conditions and are cutting costs. My visit to various locations leads me to believe that people are still willing to spend money on a night out at the Cheesecake Factory.

Although families may be dining at the likes of Bob Evans (BOBE), Cracker Barrel (CBRL) and Olive Garden (DRI) to conserve cash, diners at higher priced steakhouse chains are dining at Cheesecake Factory and other mid level casual dining chains.

Just to educate this analyst a bit, these chains did not fare so well and had recent quarterly losses: O'Charley's (CHUX), Ruby Tuesday (RT), Kona Grill; These quality chains had a similar decline in same store sales: Chili's, Maggiano's and Macaroni Grill (EAT). Many other chains that have gone private like Outback, Carrabba's and LoneStar don't report sales however they are not doing as well as CAKE.

I request this analyst to do a bit more research in the casual dining sector before sending investors into a selling frenzy bringing the stock down to her target price of 6 dollars a share which is just obscene. These analysts are the ones that are ruining our 401Ks by inciting fear. Give it some time and let the market settle down, then take an objective look at your investments.

I have been long on CAKE since 1997 and expect the stock to break out into the mid teens once consumer confidence returns later this year. When it gets to 6 dollars, we shall see if this analyst buys a slice and then gives it a buy recommendation at 9 dollars.

Disclosure: long CAKE

Comments

[Paul Price:]

Marc,

I agree with you that Cheescake Factory looks like a great value at current prices. With virtually no debt and the ability to make profits in this dreadful climate they look like a good bet for a major gain from the single digits.

What I don't understand is how you could have held continuously from 1997. CAKE shares got close to $40 a few years ago and were clearly overpriced even on, what was then, good news.

You need to sell even the best run companies when the valuation gets excessive.

Feb 22 07:39 AM

[Pj568:]

Keep in mind that the market seems to be forcing all companies to recognize debt and reduce leverage. Retail doesn't have much in SPE's but they do have long term leases which aren't reflected in debt. When you run the numbers for CAKE and convert the leases, you end up with leverage of around eight. In addition CAKE is continuing buybacks with debt. It seems management might want to stockpile some cash. The 80M referred to earlier is about half of their accounts payable and like a typical restaurant they usually don't normally need as much working capital. However this is a different environment than previous downturns.

Feb 22 10:57 AM

[jepittman:]

Wachovia securities research has some proprietary data that measures the average minutes wait for a table on friday night, the peak night for casual dining. CAKE is one of several restaurant chains measured and the data shows a slight increase in the minutes wait this year vs last year. While this does not indicate how earnings will play out it, it is a large enough sampling to indicate demand is still fairly robust. While things can still get worse, the share price appears to have already discounted a lot. Allowance for even a mild recovery out a few months looks nonexistent.

No position in CAKE, long SYY (foodservice wholesaler)

Feb 22 11:48 AM

[107Sid:]

The Wachovia Friday evening data has not been a reliable investment tool in the past. It looks like it's simply an anlyst's gimmick.

Feb 22 12:13 PM

[John Gordon:]

I know Marc wants to get his money back, but there is NO reason to think that consumer confidence will return anytime soon, OR that casual dining operators will necessarily benefit, soon. That is wishful happy talk that does no good.

Hint: check it any companys geography, urban/suburban/rural mix and site characteristics (mall vs non-mall characteristics, etc.) first.

Restaurants broadly trade in a PE range from the single digits close to 20, The casual dining operators have been the most negatively impacted by societial and economic changes, and thus, warrant a lower valuation multiple.

Nicole is a great analyst and always asks the hard questions.

We are an analytically focused restaurant management consultancy, have no stock positions, and only will provide truly independent commentary.

John A. Gordon
Pacific Management Consulting Group
pacificmanagementconsu...

Feb 22 12:49 PM

[User 362229:]

This is a horrible article and makes no sense at all:

1) CAKE's Q4 reduction attributed to global economic meldown partially due to current president. Really? Last time I checked this inexperienced president wasnt in office in q4 and the economic meltdown started way before q4.

2) How can you be long on a stock that peaked almost 3 years ago and is down by 75%. Sounds like your the one pumping there.

3) Many other chains that have gone private like Outback, Carrabba's and LoneStar don't report sales however they are not doing as well as CAKE. Whats your data here or shall we accept your sweeping generalization as true?

4) Did you happen to check lease liabilities? Or shall we just ignore that little fact?

5) Give it some time and let the market settle down, then take an objective look at your investments. Good idea. Let everyone trade around you until your portfolio is worth 10 cents on the dollar then start thinking.

Disclosure: no position on CAKE, just on stupid analysis.

Feb 22 08:30 PM

[RestaurantD...:]

Don't worry, Nicole Miller isn't the brightest bulb in the restaurant analyst universe!!!

Feb 22 09:33 PM

[doctordoctor:]

in my neighborhood, waikiki, every night starting around 5pm , cheesecake factory has lines and lines of folks waiting to get a seat in the enormous place(yes its very large). the place is absolute mobbed till around 9pm. quite impressive. not sure what the place does back in american, but over here(yes, some of us consider hawaii as a separate nation) its doing well.

Feb 22 11:05 PM