Fast Profits in Fast Food?

by: Whopper Investments
Looking for value in the food sector, I recently ran a screen to compare the some of the largest publicly traded companies in the restaurant sector.

Ticker Name P/B EV/EBITDA T12M
EV/Sales T12M
ROE T12m
2.40 7.88 0.70 21.73
WENDY'S/ARBY'S GROUP INC-A 0.94 8.08 0.91 22.14 -0.31
BRINKER INTERNATIONAL INC 4.09 8.10 0.93 17.60 27.27
(NASDAQ:PFCB) PF CHANG'S CHINA BISTRO INC 3.07 8.26 0.93 25.13 12.79
DARDEN RESTAURANTS INC 3.59 8.41 1.16 15.37 24.34
(NASDAQ:SONC) SONIC CORP 18.64 8.83 2.03 18.57 128.20
(NASDAQ:CAKE) CHEESECAKE FACTORY INC/THE 3.24 8.88 1.07 21.24 11.27
(AFCE) AFC ENTERPRISES 127.52 9.67 3.03 18.00 N/A
(NYSE:DPZ) DOMINO'S PIZZA INC N/A 9.81 1.56 12.55 N/A
MCDONALD'S CORP 5.87 10.25 3.70 16.40 36.68
(NASDAQ:TXRH) TEXAS ROADHOUSE INC 2.69 10.34 1.41 21.87 12.84
YUM! BRANDS INC 14.80 10.54 2.25 19.66 89.04
(NASDAQ:SBUX) STARBUCKS CORP 6.13 11.69 2.13 23.56 28.39
(NASDAQ:PNRA) PANERA BREAD COMPANY-CLASS A 5.43 11.69 1.81 27.54 18.87
CHIPOTLE MEXICAN GRILL INC 10.75 20.91 4.14 44.55 23.64
Average 14.94 10.22 1.85 21.73 32.80
Click to enlarge

Looking at the results, none of the companies looked particularly cheap, but I was intrigued because of the consistently high ROE throughout the sector. With that in mind, I thought I’d dig through a few of the names looking for hidden value.
JACK - The cheapest on both an EV/EBITDA and EV/S basis, Jack in the Box could have interesting hidden value. The company owns both the Qdoba and (of course) the Jack in the Box brands, and owns ~43% of their stores (the other 57% are franchised). The company has stated it aims to shift to a 70-80% franchised model, which should increase earnings visibility and returns on capital. Continued execution of this plan could make the company interesting to a PE buyer. The company currently bought about ~$100m worth of shares back last year (about 8% of market cap), so the company could use the proceeds from store sales to buy back a significant amount of shares.
WEN - Wendy’s is the second cheapest of the group on EBITDA and sales basis, and the company has a significant catalyst on the near horizon: they are looking to sell their Arby’s brand and focus exclusively on the Wendy’s brand. Given the Arby’s brand has been a huge drag on earnings and distraction to management, its sale could allow for accelerated share repurchase, debt paydown, or fund international expansion.
SONC - The company has been growing its franchise business like wildfire, increasing franchisees from 2,465 in 2006 to 3,117 in 2010. However, perhaps the most interesting part of this company is leverage: the company underwent a massive recapitalization in 2006 that gave it a significant amount of leverage, and fears over how leveraged the company is have depressed the stock price. However, the company owns a significant amount of real estate (they own the land for 251 of their restaurants and an additional 176 franchise drive ins) and could likely pay off the bulk of their debt simply by engaging in a sale leaseback of most of their debt. The heavily franchised nature of their system makes their profits and cash flow relatively stable, and as the economy continues to recover, their franchisees sales should continue to grow, resulting in royalty growth (sales were crushed by the great recession, down over 10%).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.