As a shareholder of almost any stock, you should want stable and consistent brand growth coupled with proper financial management. With the Cheesecake Factory (CAKE, Financial), you get that in spades plus a strong dividend and a stock price that is currently discounted to its historical average, the industry average and the Standard & Poor's.
Cheesecake Factory has a brand that is well known throughout the U.S. As long as people eat out, it will be a preferred destination. More important the company has rock-solid financials including 22% return on equity, 11% return on assets and gross margins north of 20%. Here’s what the company did in the last 10 years.
2007
- Revenue: $1.51 billion.
- Income: $74 million.
- Shares: 74 million.
- EPS: $1.01.
- Book: 8.13.
2012
- Revenue: $1.81 billion.
- Income: $98 million.
- Shares: 55 million.
- EPS: $1.78.
- Book: 10.80.
TTM
- Revenue: $2.29 billion.
- Income: $140 million.
- Shares: 49 million.
- EPS: $2.86.
- Book: 13.63.
It’s obvious why GuruFocus gives it a 5-star rating and why Ron Baron (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Jim Simons (Trades, Portfolio) each own more than 500,000 shares of the stock. Joining them are other big-name money managers like Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). Each of these gurus bought in at much higher prices, many of them adding to their positions in the last quarter.
But the stock has lost over 25% of its value year to date with the next earnings set to be released Nov. 1. Last quarter, the company reported top-line growth of 2% year over year, but earnings were flat at 78 cents per share. What really seemed to hurt was that after 29 consecutive quarters of positive comps, same-store sales fell slightly.
Everything is fine. Future growth will continue.
Restaurants with solid brands like Cheesecake are in a great position to raise prices with costs as well as renegotiate leases at prime locations because of the slump across retail. The Cheesecake Factory has plans to open eight stores this year and get the total store count up to 300 in the next decade, up from 208 currently. Even if the company doesn’t raise prices (it will) or buy back more stock (it probably will), the company would be generating over $200 million in profit on $3.3 billion in sales, good for $4.08 on the EPS. Plus, it’ll pay out roughly $1 per year in dividends.
With today’s multiple, this stock is not investment grade. It might be a good dividend trade if you’re comfortable earning 2.63% for 6% annualized growth. Yet, what could happen is the stock’s multiple expands back to its average 21.7x and Cheesecake’s management keeps the share buyback going. If the company buys back another 33% of its stock in the next decade, the EPS would be in the $6 range and at 21x, the share price would be north of $130 plus dividends and would likely move up to $2 per year.
Disclosure: I am not long/short Cheesecake Factory.
