Seeking Alpha
What is your profession? ×
Long-term horizon, value, long/short equity, special situations
Profile| Send Message|
( followers)

By Georgetown Jack

I have been watching BJ’s Restaurants, Inc. (NASDAQ:BJRI) for several months to see if the stock would fall from its Icarus-like heights. The short story is that during the time I was on the sidelines, it has yet to come back to a level that seems more “attractive” to my somewhat trained investment eye. For my first post of 2012, I present to you my top 12 reasons why you would be better served to buy one of the menu items before buying the stock:

  1. After reaching an all time high of $56.64, BJRI has retreated 20.0% to $45.32. I'm not sure the slide is done. However, it must be noted if you had been long the stock at the start of last year, you would still be up 27.2%.
  2. Revenues grew 17.6% as the company opened 4 new restaurants. This follows 17.2% growth in the 2nd quarter when the company opened 3 new restaurants. As a growth story, investors are looking at same-store sales which don’t include restaurants that have been open less than a year. However, it’s still instructive to see what the top line is doing.
  3. Operating margins declined 20bps to 5.6% after expanding 40bps to 6.9% in the 2nd quarter. In addition, if you adjust for “loss on disposal of assets”, the margin would have declined an additional 50bps.
  4. EPS increased 10% in the most recently reported quarter. On an “adjusted” basis, EPS growth was even better at 20%. However, that’s a bit slower than the 26.1% growth in the second quarter of the year.
  5. The company does not have any debt on its balance sheet which is a positive. The cash balance was down 27.5% from the prior quarter. Given the growth plans of the company and the elevated stock price, raising additional funds should not be a problem (for the company). However, an equity offering would dilute current holders.
  6. The company operates large “Brewhouse” style restaurants with a few legacy pizza and grill restaurants. Management calls their format “casual plus” dining. The average price point at BJ’s is $12.95 vs $13.30 at Chilli’s or $12.75 at Buffalo Wild Wings, Inc. (NASDAQ: BWLD). There is no denying that the craft-brew format is the flavor of the month. If you’re in Florida or Texas, think: Yardhouse. What happens when consumers get a hankering for something different? When (okay, “if”) the economy starts to improve, consumers may want to satisfy their desires to dine at more upscale eateries.
  7. At the 2011 shareholder meeting, management stated that they have potential for 300+ restaurants “domestically”. I am not sure the format works in too many international locales, but we can leave that one on the proverbial table.
  8. 16 analysts cover the stock, 6 have a “buy” or “strong buy” – all of the others have ratings of “hold”. Median earnings for ’12 is $1.35, an increase of 22.7% over the expected full year ’11 earnings. This means the company is trading at 34x next year’s earnings (and we are still waiting on this year’s final tally!)
  9. The PEG Ratio (or P/E divided by Growth Rate to the uninitiated) is a healthy 1.86x. While I wouldn’t expect to see this at a neutral 1 – that is, P/E equal to growth – I’d look for something that is closer to 1.5x than 2.0x.
  10. Enterprise value allows investors to compare companies with differing levels of debt. Looking at BJ’s Enterprise Value to EBITDA multiple of 17.2x suggests the company is in a league of its own. The peers look anemic in comparison: PF Chang’s (NASDAQ: PFCB) trades at 4.8x, Darden Restaurants (NYSE: DRI) trades at 8.1x and BWLD trades at 10.6x.
  11. On a revenue basis, BJ’s again looks overpriced at 2.2x vs peers that trade in a range of 0.5x – 1.7x with an average of 0.9x. The bullish argument is that on an enterprise basis, BJ’s is more in line. The average peer trades at 1.41x with DineEquity, Inc. (NYSE: DIN) trading at 2.3x.
  12. Finally, BJ’s has 111 restaurants with a market cap is $1.3 billion. This means investors value the restaurants at $11.4 million each. As noted earlier, management looks to have 300+ restaurants. If you apply today’s market cap on that number, the value drops to $4.2 million per restaurant. BWLD – the peer with the highest multiples – has 315 company owned stores and a market cap of $1.2 billion, implying a valuation of $3.9 million per restaurant. BJ’s market cap would need to drop by over 7% to reach that level…and the company would need to add over 200 new stores! BWLD has a five year unit growth CAGR of 14% – at that rate, BJ’s will reach 300 stores by…wait for it…the middle of 2019.

I was hoping to write a bullish article for the New Year as we look to move beyond the volatile markets of 2011. My work on BJ’s has me more excited about PFCB. However, I need to do more work before letting my inner bull out. Remember – the market can stay irrational longer than you can stay solvent. Just ask Whitney Tilson.

Disclosure: I do not have a position long/short in any of the companies mentioned; nor do I have a hidden agenda as I do not personally know any of the management team.