Fiesta Restaurant Group (FRGI, Financial) is a small-cap restaurant operator with a few hundred locations primarily in Florida and Texas. The company has put up strong growth for several years but recently pushed the reset button. Could it be a buy?
Fiesta has 26.75 million shares, the stock trades at $28.85 and the market cap is $771 million. Trailing 12-month earnings per share were 86 cents and the price-earnings ratio is 33.54. The stock does not pay a dividend.
Since 2011, top-line growth has been awesome. Sales were $475 million in 2011 and $687 million over the trailing 12-months. Earnings per share was 41 cents in 2011. Shares outstanding were 23 million in 2011, which shows that Fiesta has grown without diluting share holders. The price-sales ratio is a little over one, which is pretty reasonable.
The balance sheet shows $5 million in cash and $10 million in accounts receivables. The liability side shows $24 million in payables and $67 million in debt. Free cash flow has been about zero over the last few years, as management has been investing every penny into growth. If the company needed cash, it would merely stop growing and use free cash for operations.
Fiesta has two restaurants: Pollo Tropical and Taco Cabana. As of early October, there were 181 Pollo Tropicals, 164 Taco Cabanas and 34 franchised Pollo Tropicals in the U.S., Carribean and Central America. Most are in Florida and Texas. Pollo Tropical has what one would expect at a tropical restaurant: wraps, burgers, salads, etc. What is interesting is that Tropical also offers some exotic foods like yucca and plantains. Taco Cabana has very reasonable prices on its menu. I built a $5.09 burrito with its interactive menu. The burrito did not have any extras like guacomole, chips or a drink, but still that is a very reasonable price. Cabana also has a breakfast and catering menu. The tacos are only a few dollars.
In September, it was announced that Danny Meisenhammer will replace Tim Taft as CEO. It was also announced that it will suspend building Pollo Tropical Restaurants in Texas. The company plans to build 14 to 17 Pollo Tropicals in Florida and 8 to 10 Taco Cabanas in Texas.
Fiesta announced it would close 10 Pollo Tropicals and rebrand three as Taco Cabanas. It will take an impairment charge of $18 million to $20 million in the third quarter. Comparable sales from the same quarter last year dropped 1% for Pollo Tropical and 4.1% for Taco Cabana. Sales in the third quarter were 5.9% to $182.3 million, but a net loss of 17 cebts a share was recorded versus 30 cents in the same quarter last year. Capital expenditure is estimated to be $57 million to $68 million in 2017 with $35 million to $43 million in new restaurant building.
Third Avenue Small Cap Value is a shareholder. In the recent quarterly update, management pointed out several attributes of Fiesta, which was spun off from Carrols Restaurant Group (TAST, Financial). Taco Cabana too may be spun off from Fiesta. Third Avenue has a cost basis under $22 where it pegs the stock's net asset value. Looking at various analysts ratings, it seems the brokerage houses are spooked by the slowdown in growth.
So is the stock a buy? That is what the market is trying to figure out. Buying restaurants and retailers when the growth stops is tough. Fiesta was a cash cow for a while but may be saturated in its markets. Can it go north? Maybe. There are plenty of Mexican restaurants, but they can be quite profitable. You basically have meat, cheese, a few vegetables, rice and beans. The menu seems nicer than Taco Bell but I am not sure how it would stack up against Chipotle (CMG, Financial).
Disclosure: We do not own shares.
Start a free 7-day trial of Premium Membership to GuruFocus.
