Please ensure Javascript is enabled for purposes of website accessibility

Cheesecake Factory Gets Hungry Again

By Rick Munarriz – Nov 17, 2016 at 4:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The casual dining chain makes a shrewd investment in two promising eatery concepts.

One of the two concepts Cheesecake Factory is buying into is North Italia. Image source: North Italia.

If Cheesecake Factory (CAKE -1.02%) ever needs a fourth -- or a fifth -- act it may already have it in its back pocket. The company behind the high-volume namesake restaurant chain entered into a strategic relationship with Fox Restaurant Concepts on Monday. Cheesecake Factory is making an initial minority equity investment in Fox's North Italia and Flower Child, a pair of the 16 different concepts in Fox's wide portfolio of eateries. 

North Italia is a nine-unit casual dining chain, specializing in homemade Italian delicacies in a tavern setting. Flower Child has five locations, and the earthy fast casual concept assembles salads, bowls, platters, and wraps with locally sourced, all-natural ingredients. 

Fox will continue to manage the eateries, but the agreement allows for Cheesecake Factory to ultimately either grow its financial position or acquire the two young chains outright. It's dry powder for a company that seemingly doesn't need it. There are 193 The Cheesecake Factory restaurants out there, and the company also mans the slightly more upscale Grand Lux Cafe with a dozen locations and the RockSugar Pan Asian Kitchen eatery in Los Angeles. This would seem to give Cheesecake Factory plenty of concepts to build out in the coming years before taking on two more, but it's a smart move.

The Cheesecake Factory isn't the kind of concept that would fit in small markets. The average location rings up more than $10 million in annual sales, several times the casual dining average. You probably won't find more than a couple of locations even in the largest metropolitan areas. There's still room to expand, but there will never be thousands of locations. Grand Lux is a slightly fancier spin to The Cheesecake Factory, but if it's taken 17 years to open 12 locations it's safe to say that it isn't on a heady expansion track. RockSugar debuted more than eight years ago, and it's still a lone wolf.

North Italia gives Cheesecake Factory a foothold in the popular Italian casual dining niche. Flower Child will be its first foray into fast casual. They are distinctive enough to stand out from what Cheesecake Factory is presently working on, yet taking a small bet on the two concepts opens up the possibilities if its flagship concept should ever fall out of favor. That may not seem like a growing concern for a chain that has rattled off 27 consecutive quarters of positive comps, but as we've learned from other fallen darlings it always pays to be ready.

Passing ships

Wall Street pros don't agree on the direction that Cheesecake Factory is heading. Analysts at Argus and Maxim were passing ships yesterday. Argus' John Staszak upgraded the stock from Hold to Buy on Tuesday, deeming it undervalued at an earnings multiple of 19, below its five-year average P/E of 21. He sees the company opening more new locations than it's publicly projecting, and when you tack on Cheesecake Factory's consistent comps growth you have a recipe for success.

Maxim went the other way yesterday. Analyst Stephen Anderson downgraded the stock from Buy to Hold, feeling that the stock's surge since late last month makes the stock vulnerable for a pullback. He praises the potential for margin expansion, but simply feels that the stock is overvalued at the moment.

Argus has a price target of $69. Maxim's goal is perched at $59, slightly above where the stock is now trading. Investors have options, and thanks to the deal with Fox Restaurant Concepts it seems as if Cheesecake Factory has options, too. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.