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Lets Eat: Restaurant View for Q210

|Includes:APO, CAKE, CBRL, CMG, MCD, Yum! Brands, Inc. (YUM)

Lets Eat: Restaurant View for Q210 

 

Tuesday, July 27, 2010

 

While we have ample thoughts on the retail group in terms of winners and losers for upcoming earnings and longer-term as we head into 2011, we wanted to shift gears and focus on the restaurant group. Second quarter earnings for the group has been relatively positive so far with Yum! Brands (NYSE:YUM) kicking things off early this month.

 

Yum posted EPS growth of 16%, ex unusual items, which beat the street by 4 cents. There is very few that would argue that Yum has one of the best in class management teams and their ability to drive +10% annual EPS growth for the foreseeable future seems built proof. Yum raised their CYE EPS guidance to 12% vs. managements prior view of 10% but we note the mixed bag in terms of outlook by the analyst community due to valuation and the need for Taco Bell to recover in order to see stronger results out of the U.S. division. While there is concern on a deceleration in the two-year comp trend for Yum in China, the growth opportunity in one of the fastest global markets remains intact and frankly attractive.  We note the favorable comment on COGS from and was consistent with the Cheesecake Factory on their recent Q2 call as well. Thus, we believe near term the group may have upside from a costing perspective and if you believe that the consumer will dine just as much as last year (i.e. traffic) in the U.S. market then further upside may remain in the group as we enter the second half of 2010. So for Yum, at over 15x 2011 EPS consensus estimates, we will revisit later but remains on our screen. 

 

CEC Entertainment (CEC) could be a near term play and is expected to report on August 5th with analyst expectations of $0.45 in EPS and and 4% sales growth for the second quarter. CYE are $2.84 in EPS and just under 1% top-line growth. At $36, CEC trades around 11.5x NYE street expectations of $3.11. We note that Sidoti has Free Cash Flow per share estimated at $2.78 for FY10 and a $48 target price. Other positives include: large share repurchase, revamped birthday initiative (driving a higher spend per child), ability to outperform competitors due to mothers favoring wallet share over their children regardless of macro conditions, and possible tailwinds on in-put costs.

CEC bounced off the 200 SMA twice in July at the $34 level so stop-limits(5%) at our slightly below could be in-order and from an upside perspective we could see CEC testing/breaking through the $40 level, thus +10% upside. 

 

Cracker Barrel (NASDAQ:CBRL) is another name that we are warming up to. Comp trends, COGS, margins and outlook were all favorable on the last earnings call. Traffic continues to outpace the the industry for 15 consecutive quarters and lower commodity costs and healthcare costs have boosted recent results. Recent investor meetings with management indicated that the oil spill in the gulf has had “no” impact on the business and while commodity prices may turn into a headwind going forward, price increases should off-set any potential impact. Initial CYE in September of 2009 called for revenue +0.5% to +2.5% and EPS of $3.10 at the high-end of the range. The latest guidance by management in May now calls for sales to be +2% and EPS at $3.60 (both on the high-end of the range).

At $50 we note the stock has bounced off the $46 level for the fourth time in 90-days and in the last 5-days has moved up over 7%. One concern is that at $50 and higher, we believe that there is a P&L hit due to incentive comp pertaining to stock awards. We will side-line CBRL for now and wait to see how the stock trades over the next few weeks. 

 

The Cheesecake Factory (NASDAQ:CAKE) recently reported Q2 results, beating the street EPS estimate by a penny and posting respectable comps of +1.6%.  Top-line was considered a miss and what is being viewed as a “cautious” outlook by management has sent the stock down more than 5% after reporting just 2-days ago. While the company has been on a historical raise and beat trend, we feel that at 15x NYE estimates that CAKE is likely range bound for now. What attracts us to CAKE is its marketing initiatives to drive traffic and incremental ticket, menu changes that offer value with out sacrificing margin, traffic trends and excellent balance sheet (net cash). However, you can find better value and get paid to wait (dividend yield) in other names (MCD, CBRL). 

 

Chipotle (NYSE:CMG) recent posted strong results with Q2 comps and EPS well ahead of the street but note that labor cost came in short of expectations for most. This was driven by higher hourly labor costs. We also note managements comment on rising costs and plans not to off set this via pricing. We frankly have noting incremental to add to CMG at this time but note that the stock at 25x NYE is pricey unless you believe in the “Supersized” sustained growth rates it takes to warrant such a premium. 

 

McDonald’s (NYSE:MCD) seems to be a favorite lately, which is a concern. However, even at 15x, it remains below its historical average. So if your looking for a in vogue fat mac 3% play that continues to beat and recent business trends (July) suggests favorable comps, then this could be interesting. Will see what the new short data reveals and plan to do more work on this name.

 

 

Name

Symbol

Price

EPS  NYE

NYE P/E

P/B

P/S

Yield

Cracker Barrel

CBRL

50.06

4.01

12.48

5.22

0.48

1.60%

Brinker 

 

EAT

16.42

1.41

11.65

2.44

0.52

3.40%

Darden

 

DRI

43.47

3.76

11.56

3.15

0.84

3.00%

Yum! Brands, 

YUM

42.14

2.78

15.16

16.92

1.76

2.00%

AFC Enterprises

AFCE

9.84

0.92

10.70

N/A

1.70

N/A

Wendy's/Arby's

WEN

4.40

N/A

N/A

0.82

0.52

1.40%

McDonald's Corporation

MCD

70.87

4.86

14.58

5.33

3.19

3.10%

Burger King

BKC

17.70

1.47

12.04

2.08

0.94

1.40%

Chipotle Mexican

CMG

148.57

5.95

24.97

6.05

2.75

N/A

Jack In The Box Inc.

JACK

20.51

2.16

9.50

2.04

0.47

N/A

California Pizza 

CPKI

17.19

0.77

22.32

2.07

0.62

N/A

Cheesecake Factory 

CAKE

24.26

1.57

15.45

2.67

0.88

N/A

P.F.Chang's 

 

PFCB

44.02

2.29

19.22

2.84

0.81

1.60%

 

 

 

                      Short Interest

AFCE  3.5%

CAKE15.8%

CBRL  9.8%

CEC  4.9%

CMG  9.9%

MCD14.5%

WEN  2.4%

Yum  1.8%



Disclosure: Currently do not have a position in the any of the stocks mentioned.
Stocks: YUM, APO, CBRL, CAKE, CMG, MCD