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Forum List » Value Ideas and Strategies Share and discuss value investing ideas and investing strategies.  
Let them eat CAKE. The Cheesecake Factory.
Posted by: Dr. Paul Price
(IP Logged)
Date: June 13, 2008 07:47AM
Let them eat CAKE. The Cheesecake Factory.
The Cheesecake Factory: [NDQ:CAKE] June 12, 2008 close: $17.36 52-week range: $17.24 [Jan. 22, 2008] - $28.24 [Aug. 9, 2007] Cheesecake Factory operates 154 casual dining restaurants including 13 larger and more upscale Grand Lux Café units. Third party bakery sales including Costco account for about 5% of sales. CAKE is a former high-flying growth stock that was loved by all while it traded at extremely high valuations. It earned that status by taking EPS from [split adjusted] $0.10 in 1996 to $1.09 in 2005 with higher earnings in each year along the way. During most of that run, Cheesecake Factory commanded P/Es of 28x – 36x. Even now its 10-year median multiple is 32x. The economic slowdown along with higher food and labor costs, have stalled earnings since 2005. EPS dipped to $1.02 in 2006 before nudging back up to $1.04 last year. Despite a year-over-year dip in Q1 earnings it is expected that CAKE will show a full year increase to $1.13 in 2008. Analysts see continued share buy backs and menu price increases leading to $1.29 per share by 2009. Since 2004 the total outstanding shares will likely have been reduced from 77.93 MM to an estimated 65 MM by the end of this year. Long-term debt is just 34% of capitalization and total interest coverage was about 11x even after the share repurchases. The shares closed today just twelve cents above their January nadir making the current valuation the lowest ever. At today’s $17.36 they trade at just under 15.4x this year’s and 13.5x 2009 estimates. That’s less than half their old [overpriced] median. Today’s price is lower than the lows touched in the entire period 2003 – 2007. Since the end of 2002, trailing EPS are up 58%, book value is plus 46% and cash flow per share has risen 113%. Some well respected managers hold large positions here. As of the April 2008 proxy: Baron Capital held 10.6% T. Rowe Price owned 6.8% Merrill Lynch had 5.0% Officers and Directors hold about 6.8%. What would be a reasonable target price for Cheesecake shares? Even an 18 multiple on the 2009 estimate of $1.29 would bring these shares back to $23.22 or up 33.7% from present quotes. By then we should be seeing signs of an economic revival. It wouldn’t be surprising to end up seeing much higher expectations and a return to a 20+ P/E on growing earnings and a smaller share count. That $23.22 goal price seems very attainable as CAKE shares hit $24.20 - $39.30 at their peak prices in each calendar year from 2001 through 2007. They were $23.30 as recently as March. Using the Peter Lynch method of analysis… I liked it when I had to wait for a table recently. Annoying as a customer, but music to my ears as a share- holder. Not a bad thing regarding bar sales either. With Cheesecake near six-year lows and at the cheapest valuation ever, I am a buyer right now. ******************************************************************************* If you like this idea but aren’t sure about the timing… Consider this low-risk combination play. …………………………………...........................…….…..cash outlay ……cash inflow Buy 1000 CAKE @ $17.36 ……….................……... $17,360 Sell 10 CAKE Jan. $17.50 Calls @ $2.30 ………..............……………… $2,300 Sell 10 CAKE Jan. $17.50 Puts @ $2.20 …………................………….$2,200 Net Cash Outlay …………….....................…………….$12,860 If Cheesecake closes above $17.50 on expiration date [Jan. 20, 2009]: Your shares will be called [sold] for $17,500. Your puts will expire worthless [a good thing for you as a seller]. You will own no shares and have no option obligations. You will have a profit of $4,640 on your original cash outlay of $12,860. That’s a 36% cash-on-cash return over the next 7 ½ months on shares that only needed to go up by 1% from your starting point. Risk? Your break-even on the shares is the $17.36 cost less the $2.30 call premium = $15.06 /share. Your break-even on the puts is the $17.50 strike price less the $2.20 put premium = $15.30 /share. Your overall break-even is thus $15.06 + $15.30 / 2 = $15.18 /share. You could absorb a drop of $2.18/share or (12.5%) from your purchase point without incurring a loss. In a worst case scenario you will own 2000 shares of CAKE at an average price of $15.18 /share. That’s lower than the lows at any time since just after the 9/11 attack in 2001. Disclosure: Author is long CAKE shares.
Re: Let them eat CAKE. The Cheesecake Factory.
Posted by: mungerite
(IP Logged)
Date: June 13, 2008 08:35AM
In th interest of fairness the author first recomended CAKE in October [www.gurufocus.com]
This should all be one thread to properly evaluate his past forecasts on this stock.Those evaluating his well detailed fact filled writeups would be well served to read both of them
Re: Let them eat CAKE. The Cheesecake Factory.
Posted by: alanb9
(IP Logged)
Date: June 13, 2008 08:42AM
Gurufocus/moderator,
Is there any way the two threads on CAKE can be consolidated into a single one?
Re: Let them eat CAKE. The Cheesecake Factory.
Posted by: Dr. Paul Price
(IP Logged)
Date: June 13, 2008 08:49AM
Alan B,
Please help me find all your recent stock selections/write-ups. I can't seem to find any from the past month or two. How have all your picks been doing? **************************************************************************** Mungerite, You're very good at cherry picking old ones that may not have worked out yet. Why don't you ever comment on the current write-ups at the time they are written? Are you afraid you might actually have an opinion that could turn out to be wrong? Tell me, wise one, will CAKE be a good stock for those who buy today?
Re: Let them eat CAKE. The Cheesecake Factory.
Posted by: alanb9
(IP Logged)
Date: June 13, 2008 09:02AM
Stox,
Begging your pardon, I didn't criticize your pick, I merely asked if there was any way to consolidate two threads on the same company. Such an action would make it much easier for everyone involved to see all the thoughts, current and otherwise, about a company and would presumably help any reader make a better, more informed decision. I am one who believes he has much to learn. I've observed over time that one can not learn while talking, but can learn while listening. So I listen a lot and ask questions. I'll relay information if I have it, to help others. Occasionally I make observations or recommendations, but only occasionally. However, to answer your question about how my picks are doing, my portfolio returns over the past year, 3 year and 5 year periods have been significantly greater than the DJIA or the SP500 over the same time span.
Re: Let them eat CAKE. The Cheesecake Factory.
Posted by: mungerite
(IP Logged)
Date: June 13, 2008 03:13PM
doc unlike yourself I only give opinions on the stocks like WMT BRK KFT BNI JNJ MO BUD etc that I DO KNOW about and have strong moats and i gave these winners to EVERYONE ON GURUFOCUS Here and its documented .ALL were inners despite the fact that Dow i now lower than it was when ALL were picked
What I do know is thatRT RUTH SLM YSCW MER UNH AIG KEM LM CFC among others were obviously purchased UNTIMELY given their 30-75% hair cuts from where you first recommended them some of them are still down where they were recommended on the 2d and even the 3rd time I don't follow CAKE so my opinion would not mean much. Of course you did recommend it and proved your opinion is not that great either.difference is I stick to my circle of competence Is todays pick of CAKE finally right? Idont know and judging fom your past neither do you.Eventually a stopped clock is right twice a day though I do not follow ANY restauarnt stocks except MCD . As a accounting major I know they are fundamentally low margin businesses and recommending them in the fall was not only reckless but untimely Like Bill Parcells says "you are what your record is"
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