By Georgetown Jack
I have been watching BJ’s Restaurants, Inc. (NASDAQ:BJRI) for several months to see if the stock would fall from its Icarus-like heights. The short story is that during the time I was on the sidelines, it has yet to come back to a level that seems more “attractive” to my somewhat trained investment eye. For my first post of 2012, I present to you my top 12 reasons why you would be better served to buy one of the menu items before buying the stock:
- After reaching an all time high of $56.64, BJRI has retreated 20.0% to $45.32. I'm not sure the slide is done. However, it must be noted if you had been long the stock at the start of last year, you would still be up 27.2%.
- Revenues grew 17.6% as the company opened 4 new restaurants. This follows 17.2% growth in the 2nd quarter when the company opened 3 new restaurants. As a growth story, investors are looking at same-store sales which don’t include restaurants that have been open less than a year. However, it’s still instructive to see what the top line is doing.
- Operating margins declined 20bps to 5.6% after expanding 40bps to 6.9% in the 2nd quarter. In addition, if you adjust for “loss on disposal of assets”, the margin would have declined an additional 50bps.
- EPS increased 10% in the most recently reported quarter. On an “adjusted” basis, EPS growth was even better at 20%. However, that’s a bit slower than the 26.1% growth in the second quarter of the year.
- The company does not have any debt on its balance sheet which is a positive. The cash balance was down 27.5% from the prior quarter. Given the growth plans of the company and the elevated stock price, raising additional funds should not be a problem (for the company). However, an equity offering would dilute current holders.
- The company operates large “Brewhouse” style restaurants with a few legacy pizza and grill restaurants. Management calls their format “casual plus” dining. The average price point at BJ’s is $12.95 vs $13.30 at Chilli’s or $12.75 at Buffalo Wild Wings, Inc. (NASDAQ: BWLD). There is no denying that the craft-brew format is the flavor of the month. If you’re in Florida or Texas, think: Yardhouse. What happens when consumers get a hankering for something different? When (okay, “if”) the economy starts to improve, consumers may want to satisfy their desires to dine at more upscale eateries.
- At the 2011 shareholder meeting, management stated that they have potential for 300+ restaurants “domestically”. I am not sure the format works in too many international locales, but we can leave that one on the proverbial table.
- 16 analysts cover the stock, 6 have a “buy” or “strong buy” – all of the others have ratings of “hold”. Median earnings for ’12 is $1.35, an increase of 22.7% over the expected full year ’11 earnings. This means the company is trading at 34x next year’s earnings (and we are still waiting on this year’s final tally!)
- The PEG Ratio (or P/E divided by Growth Rate to the uninitiated) is a healthy 1.86x. While I wouldn’t expect to see this at a neutral 1 – that is, P/E equal to growth – I’d look for something that is closer to 1.5x than 2.0x.
- Enterprise value allows investors to compare companies with differing levels of debt. Looking at BJ’s Enterprise Value to EBITDA multiple of 17.2x suggests the company is in a league of its own. The peers look anemic in comparison: PF Chang’s (NASDAQ: PFCB) trades at 4.8x, Darden Restaurants (NYSE: DRI) trades at 8.1x and BWLD trades at 10.6x.
- On a revenue basis, BJ’s again looks overpriced at 2.2x vs peers that trade in a range of 0.5x – 1.7x with an average of 0.9x. The bullish argument is that on an enterprise basis, BJ’s is more in line. The average peer trades at 1.41x with DineEquity, Inc. (NYSE: DIN) trading at 2.3x.
- Finally, BJ’s has 111 restaurants with a market cap is $1.3 billion. This means investors value the restaurants at $11.4 million each. As noted earlier, management looks to have 300+ restaurants. If you apply today’s market cap on that number, the value drops to $4.2 million per restaurant. BWLD – the peer with the highest multiples – has 315 company owned stores and a market cap of $1.2 billion, implying a valuation of $3.9 million per restaurant. BJ’s market cap would need to drop by over 7% to reach that level…and the company would need to add over 200 new stores! BWLD has a five year unit growth CAGR of 14% – at that rate, BJ’s will reach 300 stores by…wait for it…the middle of 2019.
I was hoping to write a bullish article for the New Year as we look to move beyond the volatile markets of 2011. My work on BJ’s has me more excited about PFCB. However, I need to do more work before letting my inner bull out. Remember – the market can stay irrational longer than you can stay solvent. Just ask Whitney Tilson.
Disclosure: I do not have a position long/short in any of the companies mentioned; nor do I have a hidden agenda as I do not personally know any of the management team.