California Pizza Kitchen: Why I'm Losing My Appetite

Mar.20.07 | About: California Pizza (CPKI)

California Pizza Kitchen, Inc. (NASDAQ:CPKI) operates a chain of casual dining restaurants in the United States and internationally. Short term, this stock is not one I would recommend approaching. CPKI is in the midst of its slowest time of the year, with the Summer and the Holiday Season being the strongest for the company.

CPKI saw extreme distribution and cash flow out of the equity last week. If you are looking for an entry point, I suggest waiting until the stock tests and confirms its support at $30.40 and then look to make an entry. However, the MACD is trending bullish, contrary to the stock price, which may indicate a possible bounce.

Long term, this one really boils down to whether or not you have faith in CPKI instituting its growth plan successfully. The number of restaurants is expected to grow by 8-13% in 2007. These costs could cause volatile swings in quarterly bottom lines throughout 2007. Management, however, reported in the annual report that expansion may not be as aggressive as planned due to a variety of factors.

The biggest concern here, for me, is the company’s ability to find enough profitable locations to proceed. The company’s post-IPO growth plan,at the beginning of the decade, was a prime example of how aggressive growth can lead to the opening of unprofitable, or underperforming, locations. With this history fresh on the minds of CPKI management, it is likely they will be as measured as possible when opening new restaurants. While this will benefit the stock long-term, any slow down will significantly hurt the stock in 2007.

This is especially worrisome because the stock is not cheap. It’s current P/E ratio is near 30 and PEG ratio is nearly 1.5. Current P/E puts CPKI in the bottom half of its industry in terms of value. Forward estimates place the price-to-earnings for CPKI at 23.38, which makes it much more attractive at this price. This improvement in value would move CPKI into the top 40% of stocks in its sector in terms of how cheap the stock is relative to earnings.

Looking at the company’s financials, I am not all that impressed by its mere increase in restaurant sales of 15.4% when restaurants increased in number by 12.7% themselves. In terms of costs, I am concerned with price inflation for agricultural products in 2007, because of the booming demand for corn products.

Moreover, with the increase in minimum wage sure to come this year in additional CPK locations, the company may be forced to pass along these costs to the customer, which could have a material effect on its bottom line. The costs are especially of concern given my industry outlook: with a potential economic downturn, inflation, and housing slump hindering consumers, it’s hard to love this industry in 2007.

My new position recommendations

Short term: NOT RECOMMENDED
Long: NOT RECOMMENDED
Short sell: HOLD

Current Price: $31.52 (03/18/07)

My price targets:
Short term (1 mos): $30.50 (-3.1%)
Long term (1 yr): $30.00 (-4.8%)

Professional analysts report:
Rating: HOLD
Target: $37.25 (18.1%)
Last: From BUY to HOLD by BB&T (02/16/2007)

My industry outlook

Retail-Restaurants: UNDERWEIGHT
With a potential economic downturn, inflation, and housing slump hindering consumers, it’s hard to love this industry in 2007.

CPKI 1-yr chart
CPKI

Disclosure: I do not hold any type of position in CPKI.