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Ishan Majumdar
Ishan Majumdar
Articles (30) 

Is BJ’s Restaurants a Buy Despite the Slowdown in Casual Dining?

The stock has given positive returns in 2018 despite a slowdown and is consistently delivering good results after some solid cost management and menu innovation initiatives by the management

January 16, 2019 | About:

The casual dining sector in the U.S. has not had a pleasant 2018 as most stocks received downgrades and witnessed selloffs due to reduced same-store sales, poor traffic growth and overhead affecting margins. One of the few stocks that managed to deliver positive returns in 2018 and that is expected to keep going strong for 2019 despite its recent fall is BJ’s Restaurants (NASDAQ:BJRI).

The year 2018 brought some ups and downs for BJ’s Restaurants, but the stock ended up giving positive returns to investors who entered at the beginning of the year. After touching a high of nearly $75, the share price fell to its support levels of $50, and it has recently started showing some recovery. BJ’s Restaurants continues to be an attractive bet for 2019 despite the restaurant industry slowdown.

Consistently good results by an experienced management

BJ’s Restaurant operates restaurants rather than franchising like its peer Papa John’s (NASDAQ:PZZA). The company has about 100 restaurants, most of which are spread across Florida, Texas and California. Its core management team has been relatively stable for the past five years and is led by CEO Gregory A. Trojan, under whom the company has seen excellent revenue growth over the years.

In its third-quarter result for 2018, management beat analyst estimates for the third consecutive quarter in both revenues and profitability. The company reported revenues of $270.27 million, growing by 9.4% compared to the previous year and beating analyst estimates by a healthy $7.38 million.

Its earnings per share of 39 cents were lower than the earlier quarter but higher than what analysts had expected by 15 cents. In fact, Stifel Nicolaus upgraded its rating of the stock from “Hold” to “Buy” in January 2019.

Focus on productivity to counter the slowing restaurant traffic Ggrowth

The restaurant industry in the U.S. is certainly not at its most attractive growth phase. Per TDn2K data, there has been positive growth in same-store sales across U.S. restaurants in the previous quarter, but it is slowing down rapidly. Restaurant chains have also been increasing prices to stay profitable while meeting the rising wage and overhead costs. In such an environment, a U.S.-focused chain like BJ’s Restaurants has reacted positively by focusing on cost containment through increased operational efficiency.

Management has worked on reduction of food waste and increasing labor productivity. This is evident from the fact that BJ’s Restaurants has revenue per employee of $47,548 and income per employee of $2,064. These numbers are extremely good, especially when compared with non-franchising peers like Arcos Dorados Holdings (NYSE:ARCO). The efficiency is also evident from the three-year growth rate of the earnings per share without NRI, which is as high as 28.50%, highlighting the outstanding work of the management team.

The revenue growth initiatives by Trojan and his team have also been commendable as they have worked towards more innovation of menus in pizza, specialty salads, craft beers, grilled items and so on. There is also a greater focus on technology-based initiatives, and the digital ordering revenues are becoming a larger part of the overall top-line with every passing quarter. The highlight of BJ’s Restaurants' future growth is its new low-cost, high-ROI prototype of restaurant, which is expected to require $1 million less in investment compared to its earlier models while generating a faster payback.

The fundamentals are strong, and the stock is not pricey

BJ’s Restaurants ticks all the boxes in terms of fundamental strength. The company’s return on equity is as high as 23.05%, and it has a fantastic Piotroski F-Score of 7. The leverage on its balance sheet is low with a debt-equity ratio of hardly 0.30, which is significantly below highly leveraged chains like Domino’s Pizza (NYSE:DPZ).

The stock has a 5-star GuruFocus Business Predictability rank with more than 12.1% of annualized returns to investors coupled with an 8/10 Profitability & Growth score and a 7/10 Financial Strength score that work in its favor. In terms of valuation, BJ’s Restaurants is not pricey at all. The stock is trading at an EV-revenue ratio of 1.15 and a priceearnings ratio of 18.80, which is fairly reasonable when compared to peers like Papa John’s and Dine Brands (NYSE:DIN).

Conclusion

The best part about BJ’s Restaurants is the management’s ability to defy macroeconomic headwinds and continue to deliver good results. The efforts of Trojan and his team to ensure the optimum use of resources for enhanced productivity and the new high-ROI restaurant model with a faster payback are certainly going to bear fruit in the near future. The current valuation of the stock is reasonable and growth investors should certainly perceive BJ’s Restaurants as a good, long-term bet.

Disclosure: No positions.

About the author:

Ishan Majumdar
I am a qualified chartered accountant with a masters in management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research specializing in research and valuation of listed companies.

I have over six years' experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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