The Cheesecake Factory (NASDAQ:CAKE) is an excellent business that has been growing at a nice clip over the past few quarters. The most recent earnings report showed nice quarterly YoY revenue growth of 5.5% and strong earnings growth of 8.79%. Trading at only 21 times earnings and a projected 17 times future earnings, the stock looks like a bargain at these growth rates. Analysts seem to agree as a consensus estimate of 13 brokers has a price target of $55 a share, which represents about 20% upside from current levels. And it seems likely that we'll get there sooner rather than later as the stock recently breached its 50 day moving average in a bullish manner.
While the stock market has gotten off to literally the worst start of the year in history, it now becomes very important for retail investors to select individual stocks that have a high probability of outperforming the market. High quality restaurant stocks that are growing and pay a dividend like CAKE fit perfectly into this category with the tailwind provided by low gas prices. But CAKE looks a lot better than other businesses in the industry that are not growing as rapidly or have such a relatively conservative valuation. And while the modest dividend of 1.67% may not be enticing to most income investors, it provides at least a little income while the stock appreciates, and with a low payout ratio of only 31%, the dividend will likely be raised this year.
As mentioned above, low gas prices are helping restaurants as consumers have increased spending significantly over the past year. But it's surprising just how much consumers are spending at restaurants compared to other discretionary items. Approximately 20% of the savings that consumers are enjoying from low gas prices are being spent at restaurants, with the majority of that going to lower end and mid-priced restaurants. This is a major boon to the industry that will continue as long as gas prices remain low, which is now expected by most experts, and the job market continues to improve as well. And with the excellent job report that came out just this morning showing that almost 300,000 new jobs were created in December, this is yet another very bullish sign for restaurants. Of course, we are talking about CAKE specifically, but CAKE is outperforming most restaurants in this environment and trading at only 17 times future earnings, which is a lower valuation than the average S&P 500 company that is closer to 20.
So with CAKE what you get when you buy the stock is a modestly valued dividend paying business that is growing at a steady pace. It isn't easy to find companies like this in today's market as stocks remain overvalued even with the recent selloff. If the 13 brokers above are anywhere near accurate with their price target, and the technical signal that the stock has moved above the 50 day moving average in a bullish manner indicates that they are, we will see some nice upside over the next few weeks and months. In the meantime, we can collect a little cash flow from the dividend and sleep well at night knowing that our capital is safer than with most other stocks in the market right now.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CAKE over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.