What: Shares of fast food chicken joint Bojangles Inc (BOJA) were giving investors heartburn last month, falling 19% according to data from S&P Capital IQ on a widespread sell-off in high-priced, recently debuted restaurant stocks. As you can see from the chart below, the slide happened mostly toward the end of the month.
So what: Concerns have been circulating in the market for years now that restaurant stocks, especially newly public stocks from smaller chains like Bojangles, are overvalued. Among the restaurants taking a dive in the past month were Wingstop, Habit Restaurants, Fogo de Chao, and El Pollo Loco.
Following the collapse of stocks like Potbelly and Noodles & Company, whose shares have fallen more than 50% from their post-IPO peaks, investors seem suspicious about the future of many of these companies, nearly all of which have ambitious expansion plans. The original success of Chipotle Mexican Grill and Panera Bread created a flood of IPOs in the restaurant industry, and it is unlikely that all of them will be successful. A number, such as El Pollo Loco, tanked recently after disappointing earnings.
Now what: Trading at only 25 times earnings, Bojangles is more modestly valued than many of its competitors. Shares have already fallen a third from their opening day close in May. However, there's reason to believe that Bojangles has more life in it than some of its other high-flying peers.
Not only is its valuation more reasonable, but the company's expansion plan is more focused. Unlike other chains aiming to go national, Bojangles is planning to expand mostly in the Southeast, where it already has a strong presence, and its menu of chicken and biscuits figures to have the most success in that region. An earlier expansion in the 1980s burned the company, and management seems to have learned its lesson. The current plan is to grow the store base by 7% to 8% and eventually double the total of restaurants in the 10 states it occupies to around 1,400.
That seems like an achievable goal for the popular chicken franchise. With that growth plan in place and momentum from a solid second quarter report, the stock should soon be seeing better months than this.
