There's nothing fishy about McCormick & Schmick
The company closed out the quarter with comps inching 3.8% higher, ahead of its long-term target of unit level growth of 2% to 3% a year. The company has been consistent on that front, having grown comps in 15 of the past 17 years.
McCormick & Schmick started out 34 years ago in Portland, Ore. The 59-unit chain is so serious about its fresh seafood niche that it even keeps its menus fresh -- it prints new ones twice a day. In other words, this isn't like the more casual seafood concepts like Landry's
Growth should slow this year, with revenues expected to inch just 9% to 10% higher after a 17% spurt for all of 2005. Earnings growth will be more robust -- the operator expects earnings to clock in between $0.83 and $0.87 per share. While that may not seem like much of an improvement over the $0.78 per share the company just recorded last year, the 2006 guidance includes about a nickel per share in stock expensing costs.
The rather lackluster anticipated growth over the year ahead may find some investors questioning the stock's valuation. McCormick is fetching 28 times trailing earnings and better than 25 times forward profitability. But questioning it may be a big mistake.
The typical unit costs the company a net cash investment of $2.4 million. However, it results in $4.4 million in annualized sales, and by its third year, the company targets EBITDA (earnings before interest, taxes, depreciation, and amortization) at the restaurant level of 17.5%. In other words, if things go according to plan, the company is getting a 30% return on its initial outlay.
Despite the limited market for high-end seafood chains, McCormick & Schmick envisions eventually having 150-200 units. That should give the company plenty of real estate to conquer before we begin discussing secondary restaurant concepts.
Like most of McCormick's fresh catches, shares of the company may never come cheap. This may be the seafaring equivalent of Cheesecake Factory
Longtime Fool contributor Rick Munarriz can't imagine printing 730 different menus a year, but he admires McCormick's spunk for doing so. He does own shares in Cheesecake Factory. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.