The Cheesecake Factory: Still the Best of Breed

No matter how expensive gas becomes or if the mortgage meltdown lasts another year, Americans will never stop eating. Its foolish to think that the casual dining sector has run its course and fallen of a cliff.

My recent visit to Phoenix, one of the top casual dining markets, I drove passed at least 12 different casual dining chains within a 2-mile radius and wondered which ones would still be open 5 years from now. Analysts have been systematically beating down these chains for the past 6 months. These so called analysts are misinformed about this industry and have not realized that discretionary spending has really not come to a halt, its that the industry has expanded to quickly. There will be a slowdown in growth for a number of poorly managed chains, marked by recent dismal reports from Ruby Tuesday (RT) and Brinker International Inc. (EAT).

When the casual dining sector growth slows over the next year or so, there will be a few hardy players out there that will be part of any intelligent investor's portfolio.

I will give you a few names to chew on with my top pick being The Cheesecake Factory (CAKE). The company reported 3rd quarter earnings this evening that was a whole penny short of analyst's expectations (26 cents per share earnings), not too shabby (see conference call transcript).

CAKE's management is by far the best in the industry. In fact they will slow growth in 08 so they can buy back shares to the benefit of the company's investors. Some analysts may see this as a sign that the chain's namesake store growth is coming to a grinding halt…which is just a failure to recognize this company still has room to expand and wants to take a breather to increase cash flow.

I see this stock returning to the high 20's early next year. My other picks in this sector are PF Chang's (PFCB), more than 40% below its 52 week high, and Texas Roadhouse (TXRH) long lines continue, down over 30% this year.

As a long term holder of CAKE and TXRH, I highly recommend you visit either one of these well run establishments and see for yourself.

Disclosure: Author has a long position in CAKE and TXRH

Comments

[borisb]

i agree with this. the 2006/2007 low point on the the charts, lower $20s, has some solid potential in terms of P/E and P/S valuation and CASH FLOW buyout prospect. everytime i go to the Palm Beach and Broward county sites the experience is great. The Grand Lux is a generic "back office" clone but i am anxious to see what the ROCK SUGAR concept is going to do. I would be surprised to see apprecation towards $30 barring energy factor.

[User 117754]

They need to get a better menu than their cheesecakes. Everything else on the menu is crap.

[JohnnyFairplay]

From Canada, I have eaten at Cheesecake Factory restaurants in Thousand Oakes CA, Phoenix AZ, Norfolk VA and Albany NY. In every case long lines of customers waiting for tables, excellent service, and good food. If managed well, CAKE is bound to be a success.