Fiesta Restaurant Group (NASDAQ:FRGI) ("Fiesta") was spun-off from Carrols Restaurant Group in 2012 and now operates two restaurant brands, Polio Tropical and Taco Cabana. Both brands have had success in core markets, with 85% of Polio Tropical's restaurants in Florida and 99% of Taco Cabana's in Texas. The company is now expanding into other regions. Both restaurants are well-positioned to benefit from the healthy diet trend. Polio Tropical is one of the fastest growing ethnic food choices over the past 15 years as it takes advantage of diners' growing demand for Caribbean cuisine. Taco Cabana offers freshly prepared and authentic Mexican food and many of its restaurants are open 24 hours a day.
Restaurant-level results have been outstanding. Polio Tropical's average annual sales per restaurant are $2.6 million. Taco Cabana's $1.9 million per restaurant compares favorably to much larger competitors Chipotle and Qdoba. The company plans to expand its current small footprint (344 locations for the two restaurants combined, split evenly at 172 locations apiece), by adding 8-10% to its store base every year. Unlike many of its peers, Fiesta's balance sheet is healthy. It hasn't overindulged in debt to fund its expansion. The company has a history of generating ample operating cash flow and compounding book value.
Fiesta is reviewing plans to spin-off Taco Cabana which we view as a positive, as both brands are strong enough to stand on their own. With Fiesta trading at the low-end of its historical EV/EBITDA and EV/Sales multiples and at a discount to peers, we view the company and its assets at this price as attractive now, as well as after a spin-off of Taco Cabana. We initiated a position in Fiesta below $22 per share, a substantial discount to our conservative estimate of NAV.
From Third Avenue Management (Trades, Portfolio)'s Small Cap Value Fund third quarter 2016 commentary.
