<DAILY DOUBLE>
Monday, May 17, 1999

CEC Entertainment Inc.
(NYSE: CEC)
Phone: 972-258-4525
Website: www.chuckecheese.com
Price  (5/14/99): $38 1/8

HOW DID IT DOUBLE?

This is no Mickey Mouse stock. CEC Enterprises, the company behind the Chuck E. Cheese chain of pizzeria playgrounds, has been on a pizza roll lately.

Thanks to a concept refurbishment that found the company adding customer space and loading up on new games and prizes, same-store sales are up at Chuck E. Cheese. The demise of fellow competitors like Discovery Zone and Q-Zar hasn't hurt either.

With sales, and more impressively, margins, on the rise, CEC has become enamored on Wall Street.

BUSINESS DESCRIPTION

The company's website claims that CEC "is the really smart company that franchises and operates Chuck E. Cheese's Pizzatime Theaters." With the surging share price, one is hard pressed to question the "really smart" assertion.

There are 332 restaurants in total. The company owns 277 units and franchises the rest. This year, between acquisitions and new construction, the company plans to add 25 more stores to its company-owned roster.

Until last summer the company was known as ShowBiz Pizza Time, trading on the Nasdaq exchange.

FINANCIAL FACTS

Income Statement
12-month sales:     $392.8 million 
12-month income:     $36.4 million
12-month EPS:         $1.95
Profit Margin:         9.3%
Market Cap:         $701.5 million 

Balance Sheet
Cash:                 $8.3 million
Current Assets:      $23.3 million
Current Liabilities: $49.0 million 
Long-term Debt:      $13.6 million 

Ratios
Price-to-earnings:    19.6
Price-to-sales:        1.8 
HOW COULD YOU HAVE FOUND THIS DOUBLE?

Over the last two years, CEC has bought back $26 million worth of company stock. While executive moves like share buybacks and insider buying are imperfect tea leaves, they are a show of confidence at the top that often rewards those who follow suit.

It was easy to find the catalyst for the company's enthusiasm. Since 1995 both sales and earnings have risen every year. The company has grown by strengthening its own product while filling the void left by departed rivals.

There was a time when Discovery Zone's market cap exceeded CEC's. Most investors lumped them in the same category though there were clear differences. Discovery Zone was a premium-priced indoor playground. Chuck E. Cheese opted to give away the playground and make it up in jazzed-up pizza and beverage sales. Sure, they both sold tokens for their video arcade arsenals, but Chuck E. Cheese, absent the Zone cover charge, was able to draw folks in on perceived value.

While Discovery Zone tinkered in the kitchen, siding with Pizza Hut too late in the game, Chuck E. Cheese offered the complete family experience. The inability to cash in on hungry customers sank Discovery Zone and laser tag Mecca Q-Zar. At Chuck E. Cheese it was always the focal point.

Logical analysis, and then the company's voracious appetite for its own shares, should have tipped off a Foolish investor that this was a company that was situated well beyond its peer group. Like Dave & Buster's (Nasdaq: DANB), artfully dodging the theme restaurant fallout, Chuck E. Cheese served up quite the pie, with everything on it.

WHERE TO FROM HERE?

Furthering its margin improvement, last quarter the company reported a 13% gain in sales accompanied by a "really smart" 24% rise in earnings. The bottom line is projected to grow 23% this year (to $2.22 a share) and 20% next year (to $2.66 a share).

Is CEC worth more than 14 times next year's earnings? Probably. While unit expansion may seem conservative, with this year's additions representing a single-digit percentage gain in new locations, it is a vibrant company on a winning streak.

The ambitious Fun-Net website is slick, serving as a colorfully interactive marketing tool for the company. From a restaurant locator to printable coupons to Internet games, the cybersite has the potential to be a premier online child's destination -- now if only they would waive the fan club fee.

With calculated growth going forward, CEC seems to be doing just fine. Granted the company can't continue to tack on customer space, but the company has been able to keep the concept fresh enough to keep comparable store sales flowing in the black. The continued popularity of dual-income households making Chuck E. Cheese a regular family outing shows no signs of abating either. Chuck E.'s back!

--Rick Aristotle Munarriz (tmfedible@aol.com)

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