Carrols Restaurant Group, Inc. (NASDAQ:TAST) is a fast food company with massive potential. With a market cap of only $500 million and growing rapidly, TAST 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 21%, the company provides an interesting risk reward proposition. But despite rapid growth and analyst upgrades,the company is not yet profitable and has high debt levels.
The fast food industry has had a good year with the tailwind of low gas prices and many of these companies paying a nice dividend that becomes attractive when growth stocks are floundering. TAST is one fast food restaurant that has a better outlook than most going into 2016 as it was recently upgraded by research firm Raymond James. Analysts at the firm increased their price target on TAST to $15.50 from $14.50 showing potential near term upside of around 10%. That's not bad considering the way the stock market has been behaving lately with literally the worst start to a year in market history. But the long term potential of the company is virtually unlimited if it keeps growing so fast.
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 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.
As the world's largest Burger King franchisee, TAST is not only trending from low gas prices and high customer satisfaction, but has the additional tailwind of selling a product that is outperforming the industry. Burger King has been posting growing sales and has a young aggressive CEO that is not afraid to mix things up. But most of the changes that are going on at Burger King are marketing changes rather than changes in the menu. By sticking to its core menu items, which are its bread and butter the company saves money without having to do lots of R&D to come up with risky new items that may not actually sell well. But innovative marketing can drive sales at a fraction of the cost. A good example of this marketing is the now ubiquitous Burger King mascot that has been showing up all over TV and getting massive amounts of publicity for a relatively minor cost. For only $1 million, the mascot was able to accompany super star boxer Floyd Mayweather Jr. as he entered the arena for his most recent match, viewed by millions of people. For Burger King, this risky move was great marketing and is exactly what is needed in an increasingly competitive fast food industry.
But with so much volatility in the market and the company's high debt levels, which are about 41% of the company's market cap ($208 million to $500 million), the stock is still risky. For conservative investors looking for defense and yield in a scary market, TAST 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 TAST is an interesting pick at current levels.
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.