Hungry for a Restaurant Stock?http://www.fool.com/investing/small-cap/2007/12/14/hungry-for-a-restaurant-stock.aspx Emil Lee
December 14, 2007
It's no secret that the restaurant business is tough. Thirty percent of restaurants don't even make it to their second anniversary.
Competitors can learn from many of your trade secrets by simply walking through the door, capital costs are high, and random events like poor weather can wreak havoc on same-store sales and margins. Further, the strength of the general economy plays a large role in the performance of food retailers, and, given current conditions, things aren't looking too good for this sector.
A pizza deal too good to pass up
The company operates and licenses 226 restaurants and owns 85% of them. Unlike most pizzerias, such as Yum! Brand's (NYSE: YUM ) Pizza Hut, the menu focuses on nontraditional toppings such as buffalo chicken. It also includes pasta and salad dishes.
Scoping out the competition
Keep in mind, some of these figures are estimates, given the companies' different levels of disclosure.
How much is a slice of this pie worth?
Under the no-growth assumption, I estimate the company could earn around $77 million in EBITDA. Subtracting cash taxes and a maintenance capex of $65,000, the company would earn around $50 million per year in free cash flow. With a $465 million market cap, the company would be yielding approximately 11.5% in free cash flow, which isn't too shabby. And don't forget, we earlier estimated that California Pizza Kitchen was earning 23% on investment for new stores, so adding high returning growth prospects makes the company even more attractive.
Further, the shares have recently been beat up and now trade near the level they did back in 2004, when the company owned 20% fewer restaurants. So it isn't too surprising that savvy hedge fund Farallon Capital Management recently announced a 5.3% stake in the company.
This pizza party doesn't come without risk