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Summary

  • The company has promising international expansion plans.
  • The Cheesecake Factory managed to grow comp sales in a difficult environment.
  • The enormous share buyback programs push EPS considerably.

Overview

The Cheesecake Factory (NASDAQ:CAKE) managed to raise its top line considerably over the past five years whilst roughly tripling EPS. This went along with a 180% share price increase.

CAKE Chart

CAKE data by YCharts

The past five years have been rewarding for shareholders - but is The Cheesecake Factory a buy in 2014? Exactly that is strongly suggested by the following arguments.

International expansion

The company recently reported a new licensing agreement with Hong Kong-based Maxim Caterers Ltd for development and operation of at least 14 The Cheesecake Factory restaurants in Hong Kong, Macau, Taiwan and PR China. There is also the opportunity to expand to Japan, South Korea, Malaysia, Singapore and Thailand. The first restaurant is expected to open in fiscal 2015.

Together with the existing licensing agreements for the Middle East (UAE, Kuwait, Bahrain, Saudi Arabia and Lebanon) and Latin America (Mexico and Chile) which provide for the development of 24 and 12 restaurants respectively, this means that there will be a minimum of 50 international restaurants in a few years. Each of these restaurants will add at least $0.01 to EPS, pushing EPS about 20 percent from the current $2.10.

Domestic Growth

Inside the U.S., The Cheesecake Factory plans to open 10 new restaurants in fiscal 2014. The company also managed to increase comparable restaurant sales by 0.9% the last two quarters although the bad weather impacted sales and the current environment is not easy for restaurant companies (e.g. McDonald's (NYSE:MCD) only managed to increase its comp sales by 0.2% in fiscal 2013).

The company has been named the most preferred casual dining restaurant by Nation's Restaurant News Consumer Picks report for the last two years. Consumer preferences along with the current exposure (mainly in California and the North East) should provide plenty of domestic growth potential.

Share buybacks

Probably the biggest argument for going long on The Cheesecake Factory is the large amount of cash returned to shareholders. Along with the dividend, which currently yields at 1.2% and is about to be raised next quarter, the company spends a significant amount of cash buying back shares.

Last fiscal year the company repurchased 4.5M shares, compared to the currently outstanding 50M shares. This means a reduction of almost 10 percent, resulting in a 10 percent EPS increase, should the net income stay flat. In the first quarter of this fiscal the company has already repurchased another 2.1M shares and thus returned more than $100M to shareholders (dividend included).

CAKE Stock Buybacks (Quarterly) Chart

CAKE Stock Buybacks (Quarterly) data by YCharts

Management plans to continue returning substantial amounts of cash to investors via dividend payments and share repurchases.

What are possible risks for The Cheesecake Factory?

Should the macroeconomic situation change for the worse, consumer spending would decrease and The Cheesecake Factory, like the rest of the industry, would have to report lower top and bottom line results. I think such a scenario is unlikely for the foreseeable time.

Growing health awareness could become an issue for the company, since it offers large, high caloric portions with considerable amounts of fat and sugar. Should sales be affected by a growing trend of consumers demanding healthier restaurant options like Chipotle (NYSE:CMG), The Cheesecake Factory would have to react and adjust their menu accordingly.

Conclusion

International expansion as well as the development inside the US will result in increasing revenue and earnings, especially the share buybacks will push EPS and thus stock prices. With a dividend yield of 1.2%, the growth potential and a forward P/E of 17.5, I think the stock is slightly undervalued at the moment and I stay long on The Cheesecake Factory.

Source: Why The Cheesecake Factory Is A Buy