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Dan Plaxe

 
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  • Chuy's - Priced Beyond Perfection [View article]
    Actually, my thesis is quite sound and my fundamental analysis is flawless. I have yet to find anyone who can challenge my analysis with real quantitative reasoning. It just takes some time for the market to recognize under- and over-valued stocks and adjust accordingly. Of course, it's impossible to predict the timing, but smart, contrarian investors are able to see through the market's BS. Since hitting a high of $44, CHUY has dropped $10 (23%) in an astonishingly quick time frame. I killed it on this short. I hope you weren't long.
    Jul 30 06:13 PM | Likes Like |Link to Comment
  • Chuy's - Priced Beyond Perfection [View article]
    I agree that Chuy's out-performance of the market in the last 2 weeks has been frustrating, as the company remains massively over-valued. To wit, I just analyzed the Noodles & Co. IPO which debuts this week. Noodles is a high growth, fast casual restaurant concept offering noodle & pasta dishes. The company has 343 restaurants (291 company owned, 52 franchised) with average unit volume of $1,178,000 and positive comparable store sales in 28 of the last 29 quarters. In the TTM period, Noodles generated $312M of sales and $36.5M of adjusted EBITDA (11.7% margin). Revenue growth has been in the mid teens (13-17%) for the last couple years. At a $17 per share offering price, Noodles has the following stats: $486M market cap and $509M enterprise value with the company valued at 1.6x sales and 13.9x Adjusted EBITDA. At $40 per share, CHUY is trading at 3.6x sales and 22x Adjusted EBITDA. Btw, the average high growth restaurant chain is trading at 1.7x sales and 11x EBITDA. CHUY IS MASSIVELY OVER-VALUED!
    Jun 25 08:55 PM | Likes Like |Link to Comment
  • Chuy's - Priced Beyond Perfection [View article]
    This stock has had an exceptional move in the last week on zero news. I have yet to find anyone who can make a credible argument that CHUY is reasonably priced on a fundamental basis (you know, based on metrics supported by Benjamin Graham, Warren Buffet, Seth Klarman and other famous value investors). The stock is trading at 22x 2013 estimated EBITDA and is only growing revenue 20-25% year over year. This level of growth has been priced into the stock since its IPO and there's no upside when same store sales are 1-2%. The high growth rate is inorganic (the result of new restaurant openings) and the laws of math dictate that the growth rate is SLOW as the underlying store base grows (8 new stores on a base of 40 units seems impressive, but 12 new stores on a base of 120 units looks measly). Stock prices will ultimately be a reflection of a company's potential to generate cash flow for shareholders. The only things that will bring this stock back to earth are (1) macroeconomic uncertainty in the U.S. (not likely in the near term), (2) another crisis in Europe or somewhere else (uncertain), and (3) CHUY's earnings (because investors will eventually understand that the level of earnings does not justify the stock price).
    Jun 17 04:20 PM | Likes Like |Link to Comment
  • Chuy's - Priced Beyond Perfection [View article]
    Actually you're wrong about several things. First, I did include some "documentation" in the form of a spreadsheet link within the article. Second, Chuy's does lease 100% of its restaurants but that doesn't mean the company can finance 100% of the build-out and equipment used within the restaurant itself. If you took the time to examine Chuy's Statement of Cash Flows, you'd see that Chuy's spent $26.8 million for capital expenditures in 2012, after spending $20.5 million in 2011 and $16.4 million in 2010. By the way, Chuy's spent more in capex than the company earned in Adjusted EBITDA is those 3 years. Again, refer to my spreadsheet where free cash flow (defined as Cash Flow from Operations minus Capex) has been negative for the last 5 years. Lastly, Chuy's growth is high in percentage terms but is measly in terms of unit growth. Sure, the company will open 8-9 restaurants in 2013 and their "growth" will look high, but other fast growing chains will open 50+ stores off a much larger unit base. Let's face it, Chuy's will not be considered a proven concept until it's operating 150+ stores and it's nowhere near that number today.
    Apr 15 10:21 PM | Likes Like |Link to Comment
  • Chuy's - Priced Beyond Perfection [View article]
    I couldn't disagree more strongly with your statement that "if Chuy's stopped expanding and solely focused on operating its existing restaurants, it would be worth more." How do you come to that conclusion? What financial analysis are you doing? It's patently wrong. The market is valuing this company at absurd levels because of its high (inorganic) growth. No investor would pay 18x one-year forward EBITDA for a company growing organically at 1-2% per year.
    Apr 15 10:08 PM | Likes Like |Link to Comment
  • Chuy's - Priced Beyond Perfection [View article]
    It's not a coincidence that both GeoTeam and I wrote articles yesterday about how grossly over-valued CHUY is because nothing and no one can justify the multiples that the company is trading at. In a go-go, momentum-drive market where investors have turned their brains off, high-beta "growth" stocks like Chuy's generally perform well (absent an earnings miss). But look at what happened today: the S&P 500 index fell 0.5% and CHUY dropped 6.7% (20 times the market decline). If we ever experience a period when the market drops 5%, I expect CHUY to decline 20-30%. People run for cover when the market falls, and they'll dump small and mid-cap cyclical stocks with little trading or earnings history (like CHUY) in favor of large cap consumer stables/utilities or cash/bonds. No one can predict when CHUY will crack, and maybe it drifts higher in the near-term, but the current valuation is unsupportable and unsustainable and when the momentum fades, no one will be there to step in.
    Apr 12 03:49 PM | Likes Like |Link to Comment
  • Chuy's - Another Overvalued Restaurant Company? [View article]
    Good tasting food has nothing to do with investing in restaurant companies. The food at Chuy's could be wonderful, but it doesn't mean the stock is a buy.
    Jan 15 02:34 PM | Likes Like |Link to Comment
  • Valuation-Based Contrarian Picks [View article]
    Interesting article. You use a simple model/forecast which nicely illustrates your point about valuation. Btw, I think "simple" is a good thing. Most financial analysts that create complex financial models have way too many assumptions and they ultimately get lost in "analysis paralysis". All these companies are probably high growth companies, but at some point growth will slow and using a "generous growth stock P/E" makes sense. I agree that Annie's (BNNY) is way overvalued, and have written two SA articles about it. I haven't studied Kramer's picks (or his CNBC stock-picking track record) but he was gushing like a little school girl when Annie's CEO was on his program and never once talked about the insane valuation for the shares. Thanks for the article, Joe.
    Nov 5 12:01 PM | Likes Like |Link to Comment
  • Chuy's - Another Overvalued Restaurant Company? [View article]
    When I write articles, I don't push a certain agenda, which is maybe why my posts come across as more balanced than some writers. I don't hate Chuy's as a company - you're correct that I point out some of the company's strengths and potential opportunities - I simply hate the valuation (which is why the conclusion fits). Your idea that "valuation doesn't matter with many growth stocks" is simply ridiculous. That's exactly the kind of mentality that gets most investors in trouble, particularly in a down market (when companies with astronomical valuations get crushed). Most people think investing is about finding good companies. WRONG. Investing is a two step process. The first step is finding good companies. The second step - the one most overlooked by investors - is paying a fair price for those good companies. Here are the formulas you should use:

    Good company + fair (or undervalued) price = good investment
    Good company + overvalued price = bad investment
    Bad company + any valuation = really bad investment

    Overpaying for a good company is simply NOT a good investment. Just ask Benjamin Graham, Warren Buffet or countless other "value" investors that have come before and after them. [As a side note, I suspect most investors overlook or ignore the valuation aspect of the equation because they aren't financial/Wall Street wonks like myself who know how to value companies]. So CHUY has declined almost every day since I wrote the article - close to 14%. My only question is this: how much more are you gonna buy????
    Oct 16 02:45 AM | Likes Like |Link to Comment
  • Chuy's - Another Overvalued Restaurant Company? [View article]
    I have never eaten at Chuy's and therefore cannot comment on the quality of the food, service or atmosphere. A previous SA post on Chuy's entitled "Chuy's: Successful IPO Debut Despite Chipotle's Freefall" had a comment below the article that said Chuy's had "the worst food of any Mexican restaurant with the possible exception of Pancho's Mexican Buffet." Chuy's average unit volume (AUV) is quite high so they must be doing something right (meaning striking the right balance between food & service quality, atmosphere, price/value, and the right locations & advertising).
    Oct 10 01:48 PM | Likes Like |Link to Comment
  • Why Annie's Stock Is Bound To Drop [View article]
    Do ratings mean anything? You forgot Canaccord Genuity - Hold, Stifel Nicolaus - Hold, etc.

    But seriously, thank you for reinforcing my point that Wall Street has never met a stock that it doesn't like. Most banks have a "buy" or "outperform" rating, but when you read their research, the analysts are completely spooked by the valuation. Here's a quote from one of the analyst's that has a "buy" rating:

    "Annie's Q1 results seemed somewhat pedestrian for such a high multiple stock....Our $47 price target reflects Adjusted EBITDA of 25-30x 2013 estimates.... Our price target reflects a significant valuation premium, which leaves little margin for error."
    Oct 4 04:49 PM | Likes Like |Link to Comment
  • Why Annie's Stock Is Bound To Drop [View article]
    Thanks - I agree that not owning manufacturing operations isn’t a big negative for a young company like BNNY at this stage in its lifecycle. That said, there will be a point in the company’s lifecycle when controlling this step of the supply chain will be imperative. Regardless, the sole problem with this stock remains its valuation, which is obscene on both an absolute and relative basis (meaning relative to its “comp” peer group).

    No rationale investor should pay 25x 2-year forward EBITDA for ANY company. I would argue that the most aggressive multiple that a rational investor should ascribe to BNNY is 15x FY2014 EBITDA (for the fiscal year ending 3/31/14). In order to justify the current stock price, BNNY has to “grow” into its Enterprise Value by generating ~$53 million of EBITDA by FY2014. In FY2012 (the year ended 3/31/12), BNNY generated $21.3 million of adjusted EBITDA. Therefore, the Company needs to achieve EBITDA growth of 58% PER YEAR for the next TWO YEARS to growth from $21.3 million in ’12, to $33.7 million in ’13, to $53.3 million in ’14. Wall Street is currently forecasting ~25% EBITDA growth per annum for the next two years, or EBITDA of $33 million in FY2014. There's a big difference between $33 million of consensus EBITDA and what they need to achieve: $53 million of EBITDA. BNNY has to trump Wall Streets' growth estimates by a factor of 2x to MEET the market’s expectations. Again, this stock is priced for perfection, and will fall eventually.
    Sep 27 04:45 PM | Likes Like |Link to Comment
  • Why Annie's Stock Is Bound To Drop [View article]
    It’s very difficult to explain why markets succumb to “irrational exuberance” or why speculative bubbles appear in financial markets or in individual securities. The underlying premise to your question seems to be: the stock is trading in the high $40s (25x 2-year forward EBITDA), therefore the market MUST be right – the market knows something that the rest of us don’t know. In other words, you’re a proponent of the “strong form” of efficient-market hypothesis (“EMH”) which asserts that financial markets are "informationally efficient" and stock prices reflect all information, public and private, and no one can earn “excess” returns.

    Yet history is replete with examples to the contrary. For highly liquid, large cap stocks (think IBM or MSFT), I too believe in the semi-strong to strong versions of the EMH. But for illiquid, small cap stocks like BNNY, the empirical evidence shows that the “weak form” of EMH is closer to reality. Many stocks are either over- or undervalued (compared to intrinsic value) at any point in time.

    [As an aside, people that are firm believers in the “strong form” of EMH shouldn’t be on this site looking for investment advice/stock picks, they should just buy the S&P 500 index and go fishing. By participating on this site, a person is essentially signaling that “excess return” can be found through careful stock selection.]

    In my article I did talk about how fundamental investors can get caught up in overly aggressive growth assumptions. But momentum investors are usually the ones who typically propel a stock well beyond reasonable valuations. I believe that may be part of the explanation with BNNY. BNNY has a small float and share count and is more prone in supply/demand imbalances. I will also point out that there’s a high number of short shares (29% of float according to Yahoo), and short investors may have gotten caught in a squeeze in the last 30 days (the stock went from ~$40 to a peak of ~$49 in a short period).

    Honestly, I can only speculate why the stock is at these levels. At base, I’m just a number-crunching finance geek and I can’t find a reasonable path to justify the current valuation.
    Sep 26 01:41 PM | Likes Like |Link to Comment
  • Why Annie's Stock Is Bound To Drop [View article]
    I agree that the timing of the break is difficult to forecast. The catalyst for a downturn could be anything from BNNY's performance (failure to meet the market's high growth expectations), to the performance of other companies in the natural/organic segment (Whole Foods, etc.), to a downturn in the US economy. Due to the timing uncertainty, I bought in-the-money puts expiring in March 2013, which is as far out in time as I could go.
    Sep 25 04:22 PM | 1 Like Like |Link to Comment
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