Investors in Chinese food restaurant concept P.F. Chang's China Bistro (Nasdaq: PFCB) got a treat this morning in the form of the company's Q4 financial results, which topped analysts' expectations. Revenues egg-rolled in at $48.9 million, up 97% year on year and 19% sequentially. EPS for the quarter was $0.22 compared to $0.12 in Q3, smashing the First Call mean estimate of $0.17 like a mallet to a fresh snow crab leg. Investors responded to the results by driving the company's shares up by about 12% in early trading this morning.

To investors new to the restaurant industry, P.F. Chang's may seem like a no-brainer just on its growth rates alone. However, investing based solely on earnings and sales growth -- without any further analysis of the company, its capital needs, its industry dynamics, etc. -- can be more dangerous to your health than three-week old Mu Shu pork. The restaurant industry's serving floor is littered with concepts that got hot for a while due to fast growth early on, but ended up burning shareholders when the concept became stale over time. Need an example? Check out this recent Fool on the Hill column for a relevant postmortem.

With customers latching on to P.F. Chang's eye-pleasing settings and tastebud-satisfying menu, management is focusing on expansion. The company currently operates 39 units, up from 23 at the end of 1998 and 7 at the end of 1996. Two new units were opened in the fourth quarter, with another three having already opened their doors in the current Q1. The plan is to have 51 units up and running by the end of fiscal 2000.

It's at this point in the script -- when the customer lines are stretching out the door and the national expansion plan is gearing up -- that so many hot restaurant operators of yesteryear have screwed up everything. With history in mind, P.F. Chang's expansion strategy is wisely conservative, as CEO Rick Frederico explained recently in a Wall Street Transcript interview. "We look at this as an opportunity to build 13-15 restaurants a year, to do a great job opening and operating 13-15 restaurants a year, to be able to continue to grow our existing store base in terms of increasing customer visits on a regular basis... [T]hat's a better balanced and a more prudent approach to developing the organization than trying to race out there and build as many as we can as quickly as we can."

With combined same-store sales at units open at least 18 months up 12% in 1999, the customers appear to be coming back to P.F. Chang's at a healthy clip. A further indication that management has their Peking ducks in a row is the company's return on invested capital, which came in at around 11% in 1999 using numbers from today's earnings press release and capital figures from the September quarter 10-Q. Since restaurant operators in full-out growth mode often falter in this area, this is an encouraging sign that the company's impressive performance may in fact be sustainable.

In a market stuffed to the gills with downtrodden restaurant stocks, P.F. Chang's share price has bucked the trend and is up 133% since the firm's IPO in December 1998. As a result, the company's promise now comes at a steep price. With today's rise, P.F. Chang's trades at a whopping 52 times 1999 reported earnings of $0.54 per share and 37 times this year's estimate of $0.76 per share. But judging by the way the company is performing, the 2000 earnings estimates are likely too low, meaning the forward P/E ratio is overstating things. Restaurant investors looking to add some spice to their portfolios may want to take a closer look.

Related links:

• Fool on the Hill, 02/10/00: The Rainforest That Couldn't Be Saved
• Fool on the Hill, 12/28/99: A Hunger for Restaurant Companies

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