Fiesta Restaurant Group Executed Well In FY 2014

Summary

• Fiesta Restaurant Group was successful in bringing customers through the door in FY 2014.
• Fiesta Restaurant Group executed well on employee selection and training.
• Fiesta Restaurant Group reduced long-term debt and interest costs.

On Feb. 19, restaurant holding company Fiesta Restaurant Group (NASDAQ: NASDAQ:FRGI) which operates and franchises the Pollo Tropical and Taco Cabana restaurants came out with its 2014 earnings announcement and annual 10-K. The company had an excellent year in FY 2014. Let's take a closer look.

Robust fundamental improvement

In 2014, Fiesta Restaurant Group's revenue and net income increased 11% and 291%, respectively year-over-year. The absence of a loss on extinguishment of long-term debt contributed heavily to this net income expansion. Its free cash flow deficit shrank 8% year-over-year despite increasing its capital expenditures 58% on the build out of new locations and the remodeling of old ones.

Refreshingly, Fiesta Restaurant Group is working on reducing its long-term debt which is in stark contrast to the large number of companies that have increased their appetite for debt due to historically low interest rates. Fiesta Restaurant Group reduced its long-term debt 7% in 2014, going to 34% vs. 46% in 2013. This lies way below my personal threshold of 50%. Happily this resulted in an 88% reduction in interest expense. Times interest earned went from a scary 2.6 times in 2013 to 26.6 times in 2014. The rule of thumb for safety lies at five times or more.

The only thing I don't like about Fiesta Restaurant Group's balance sheet is that, its $5 million in cash came in at a mere 3% of stockholder's equity. I prefer to see companies with cash amounting to 20% or more of stockholders' equity to get them through rough times.

Doing many things right

Fiesta Restaurant Group saw a 4.6% increase in guest traffic at its Pollo Tropical locations and 0.1% increase in guest traffic at its Taco Cabana locations. I like this, because it means that the company's fundamentals are driven by demand increases. It also means that Fiesta Restaurant Group remains committed to the group of people who pay its bills - the customers. Customers like the experience at their locations and keep coming back. During 2014, the company executed well on important things such as employee selection and training; in addition to expansion and remodeling.

One downside

The only thing I worry about is that it has been free cash flow negative since 2012, according to Morningstar, due to steadily increasing capital expenditures related to its expansion. I would like to see the company generate and save some cash. Otherwise, its financial position could be compromised, and the company would need to rely on outside financing, such as more debt or a stock sale to keep going.

Looking ahead

Unfortunately, the Fiesta Restaurant Group's excellent execution in the restaurant business hasn't gone unnoticed by Wall Street. According to Morningstar, the company trades at an astronomical P/E ratio of 47 vs. 18 for the S&P 500 making it vastly overvalued. I believe this company will continue to execute well on bringing customers through the doors. However, I remain neutral on the company. I would like to see Fiesta Restaurant Group scale back some (not too much) on capital expenditures, so that it can have some internal free cash flow generation. I would also like to see a lower valuation before investing.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.