Del Taco (NASDAQ:TACO) is a fast food company with massive potential. With a market cap of only $384 million and growing rapidly, TACO is an interesting pick for the enterprising investor looking for growth amid a turbulent market. With the most recent earnings report showing quarterly YoY revenue growth of 6.5% and a forward P/E of only 16 compared to the overall market's average closer to 20, the company provides an interesting risk reward proposition. But investors should expect a bumpy ride with uneven earnings and high debt levels.
One of TACO's biggest competitors, Chipotle Mexican Grill (NYSE:CMG), has taken a beating for the recent E. coli scare that caused a national sensation as several customers became sick from the restaurant's food. Chipotle's pain may be TACO's gain as customers food safety fears keep them away from the up and coming chain's restaurants. CMG's stock has taken a beating falling from a high of $754 a share in August to only today $442 today, representing a total decline of 42%, a staggering loss. As CMG customers find their way to TACO's restaurants, sales will be bolstered even more than they already are by increased spending from low gas prices.
With Saudi Arabia, the largest oil producer in OPEC, recently announcing that they will continue to produce oil at high levels despite the global over-supply, prices continue to decline. The more oil prices decline the more consumer discretionary spending increases. In fact, research shows that consumers in America spend up to 80% of their gas savings and the largest portion of this money is spent at restaurants. It is estimated that the average American spent over $2000 a year on gas before the decline in prices over the past year. If the statistic above is true that we spend 80% of our gas savings and most of that goes to restaurants, then the average person is spending over $1000 year at restaurants, a substantial figure.
One reason for caution however, is the fact that while the top line grew 6.5% last quarter, earnings actually declined 74%. While that number looks scary, it was mostly due to one time costs of opening up new stores. Zack's ranked the stock a buy back in September due to increased sales and results, and this performance seems to only be getting stronger. As investors look for individual stocks that will outperform the market, TACO may provide a lot of upside if their current performance continues. And with a forward P/E of only 16 the stock looks to be trading at a nice valuation considering the fact that they are growing so rapidly off of such a small market cap.
But with so much volatility in the market and the company's high debt levels, which are about 45% of the company's market cap ($176 million to $387 million), the stock is still risky. For conservative investors looking for defense and yield in a scary market, TACO probably isn't for you. But for enterprising investors looking to add some risk to their portfolio with the promise of huge potential gains, then I think TACO is an interesting pick at current levels, especially considering the fact that one of it's main competitors is reeling from a serious national PR fiasco.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.