You Don’t Have to Be a Genius to Love Einstein Noah

Einstein Noah Restaurant Group may be the next fast-casual home run.

Jun 5, 2014 at 5:30PM

Source: Eistein Noah Restaurant Group

You would think that there is nothing special about a fast-casual bagel chain, but in many ways Einstein Noah Restaurant Group (NASDAQ:BAGL) may be a better bet than even Dunkin' Brands Group (NASDAQ:DNKN). Both are in the process of rapidly expanding their store counts, but little Einstein Noah may be the David to Dunkin' Brands Group's Goliath when it comes to stock-price value.

The pretty-please-with-cream-cheese-on-top results
Einstein Noah Restaurant Group reported fiscal first-quarter results on May 1. Total revenue rose 3.3% to $109.9 million. Systemwide same-store sales popped 1.6%. They would have matched the 3% estimate of the company if not for the negative weather. Company-owned restaurants reported their fastest quarterly same-store sales growth in six years. Adjusted pre-tax income from operations inched up 4.4% to $5.6 million.

The same-store sales increase was a tad better than what Dunkin' Brand Groups saw. During its first quarter, Dunkin' Brands Group's same-store sales in the US grew by 1.2%. Dunkin' Brands Group likewise blamed the "severe weather" for having a significant impact on its results. The company expects its US Dunkin' Donuts locations to show same-store sales growth of between 3% and 4% for 2014.

Where it starts getting interesting
Einstein Noah Restaurant Group began the year with 852 restaurants while Dunkin' Brands Group had over 18,300 locations. The sheer enormous sizes of the Dunkin' Brands Group chains makes it much more difficult for the company to grow them at the percentage rates possible for Einstein Noah Restaurant Group.

Dunkin' Brands Group plans to open between 685 and 800 net new locations in 2014 for an increase of around 4%. Einstein Noah Restaurant Group, however, plans to open between 75 and 85 new locations for an increase of between 9% and 10%. If the chain continues to prove to be popular, there could be a very much wide open untapped market out there somewhat similar to what Dunkin' Brands Group saw in the earlier years.


Source: Eistein Noah Restaurant Group

Sharing the dough
Both companies are returning large chunks of their profits back to shareholders in the forms of dividends and buybacks, but Einstein Noah Restaurant Group's actions seem more generous to shareholders than those of Dunkin' Brands Group.

Einstein Noah Restaurant Group pays a quarterly dividend of $0.13 per share which comes out to an annual yield of 3.4%. It also announced a $20 million share buyback program which equals over 7% of its current market cap.

In comparison, Dunkin' Brands Group pays a $0.23 per share quarterly dividend for a more modest 2.3% annual yield. It has authorized a much larger buyback at $125 million, but compared to its $4.76 billion market cap it's much smaller at 2.6%.

Dividends and share buybacks are important indicators because not only do they put cash in shareholders' pockets, they signal management's confidence as these actions often tend to speak louder than simply words.

Further valuation
Dunkin' Brands Group trades with a P/E of 25 based on the current share price and fiscal 2014 analyst-estimated earnings per share of $1.80. This compares to a P/E of just 16 for Einstein Noah Restaurant Group using the same criteria. However, analysts may be significantly underestimating earnings per share for Einstein Noah. On average, they only expect 4.4% sales growth this year and 4.9% growth next year. How can this be?


Source: Eistein Noah Restaurant Group

With restaurant growth alone greatly exceeding that, and with management stating that the new restaurants tend to have 10% higher sales than existing restaurants, the estimates would only make sense with the expectation of a big same-store sales dive. With the first quarter seeming to be the most challenging for everybody in the industry, and Einstein Noah Restaurant Group having its best quarter in six years then in terms of growth, it seems highly unlikely that same-store sales for 2014 won't show an increase.

Foolish Takeaway
The bottom line is that Einstein Noah has a much lower P/E than Dunkin' Brands Group based on current estimates, as well as a higher dividend yield, a higher stock buyback percentage, a higher restaurant growth rate, and higher potential percentage growth ahead. Dunkin' Brands Group has the superior name recognition, especially among the public markets, but that should shift slightly more in Einstein Noah's favor in the coming quarters.

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