Going out for dinner, I have always been one of those who searched for the local favorites. Most of my top-recommended places to eat are little "mom and pop" restaurants that only the locals know about. Sitting down to my first meal at P.F. Chang's China Bistro (NASDAQ:PFCB), I was sure it would be another chain restaurant -- good but nothing special. After munching on Chang's Chicken Lettuce Wraps, Peking Dumplings, and Chang's Spicy Chicken, then topping it all off with a favorite wine, I believed without a doubt that I had just downed the best Chinese meal I ever had.

Immediately, my investor wheels were spinning. Convinced this was a product worthy of hard-earned dollars, I set out to research the company and determine if the stock was selling at a reasonable price.

That's a lot of rice
One thing you will find is that P.F. Chang's is growing at a nice pace. It currently has 110 China Bistro units and 37 Pei Wei Asian Diner units. For 2004, it is planning to build 18 new Bistro units (a 16% increase) and 20 additional Pei Wei units (a 54% increase).

Based on its latest 10-K filing, P.F. Chang's increased revenues by 32% in 2002 and 2003. For those who closely monitor P.F. Chang's stock, you will know its earnings per share (EPS) for the past few years were revised downward -- a recent article by Rick Aristotle Munarriz (TMF Edible) highlights the reason behind the restatement. Due to this revision, 2003 EPS decreased from $1.06 to $0.97. Despite the lowered earnings, P.F. Chang's was still able to manage a 42% increase in EPS from 2002 to 2003. For 2004, the initial projection was to earn a $1.36 per share, but to account for the one-time charge associated with the restatement, the forecast was lowered to an EPS of $0.97 -- virtually no increase from 2003 to 2004.

Growth is nice, but show me the cash. As of its latest 10-K filing, P.F. Chang's has $45.5 million in cash and long-term debt of only $136,000. Over on the cash flow statement, we find that for 2003, its net operating cash flow was $69.5 million after backing out the tax benefit from stock options. Subtracting out the capital expenditures of $63.6 million, one comes up with a free cash flow (FCF) of $5.9 million for 2003.

Too spicy
Though it is making a profit and producing cash, P.F. Chang's net profit margin of 4.5% is not as high as one might like. This is the restaurant business, however, and low profit margins come with the territory. Additionally, there is some share dilution -- 1.7% for 2003. As long as this rate remains steady, then this percentage is acceptable. A potential concern for investors may be the lack of insider ownership (currently less than 5%), but the minority ownership program for managers, similar to the ownership program implemented by Outback Steakhouse (NYSE:OSI), provides an added incentive for performance.

OK, it all looks tasty, but is there something unpalatable in those spring rolls? Rest assured, spring rolls are Chang-licious, but the greatest hurdle I currently see in making an investment in P.F. Chang's is its stock valuation. With the current price hanging around $50, it has a market capitalization of $1.3 billion. Adding its long-term debt and substracting its cash, P.F. Chang's sports an enterprise value (EV) of $1.25 billion. Dividing the enterprise value by its free cash flow, we come up with an EV/FCF of 211. Ouch! That kind of spice will take your breath away. Assuming no growth or decline in free cash flow, it will take 211 years to get back what you are paying for when buying P.F. Chang's stock at these prices. With a price-to-earnings (P/E) ratio of 50, that far exceeds its average EPS growth of 26%. The stock is richly priced just about any way you slice and dice it.

A recent Smith Barney survey of 200 casual dining restaurants found that P.F. Chang's had the longest wait times, with 62.3 minutes. The next-closest competitor was Darden Restaurants' (NYSE:DRI) Red Lobster, with 35.9 minutes. As we wait in line for a table, investing patience may also be in order right now. P.F. Chang's has created a hot product, and likewise its stock is dashed with a spicy price. If this is a company that interests you but you haven't yet made an investment, you may want to consider holding off to make an initial purchase until the price presents a more reasonable value. Though I'm not inclined to pay a fortune for this cookie, I'll remain satisfied with its after-dinner fortune cookies.

Now what?
Want to hear what other Fools are saying about P.F. Chang's? Check out our discussion board dedicated to the company. If you find P.F. Chang's stock to be too pricey for your liking but are looking to invest in solid growth companies with a comparable market capitalization, consider a subscription to Motley Fool Stock Advisor.

Jeremy MacNealy loves P.F. Chang's Spicy Chicken, but he finds its stock too spicy for his tastes. JMac does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors.