Please ensure Javascript is enabled for purposes of website accessibility

3 Stocks Cheaper Than Cheesecake Factory

By Rick Munarriz – Updated Apr 5, 2017 at 9:09PM

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 chain named after its desserts isn't as sweet as it used to be.

Cheesecake Factory (Nasdaq: CAKE) is starting to feel as heavy as some of its decadent desserts. Its shares opened lower this morning after the company posted distasteful fourth-quarter results.

Earnings before legal settlement costs fell to $0.22 a share for the quarter, off from the $0.26 a share the casual dining chain earned during the same period a year earlier. Revenue climbed 13% to $406.3 million, but don't get too excited. The increase is merely the result of tacking on 21 new Cheesecake Factory and Grand Lux locations over the course of the year. Comps for the quarter actually fell by 0.4%, a rarity at the chain that once had a decade-long streak of posting higher comps.

Investors aren't happy this morning, and rightfully so. Wall Street was looking for a profit of $0.26 a share on $413 million in revenue. The company is also scaling back its expansion plans. It will open no more than nine new eateries this year, after opening 21 locations in each of the past two years.

Mr. Market doesn't like it when promising chains scale back on the building permits. We've seen shares of Starbucks (Nasdaq: SBUX) and Jamba (Nasdaq: JMBA) pull back in tandem when the companies pull back.

This doesn't mean that 2008 will be a wash. A third concept will enter the playing field when the company debuts its Rock Sugar Pan Asian Kitchen later this year. Cheesecake Factory still expects to grow revenue by 10% to 12% and earnings per share by 10% to 15%. That doesn't necessarily mean that margins will reverse course and improve: The key phrase there is "per share," because the company has been aggressively repurchasing stock, inflating profits on a per-share basis.

Building the better cheesecake
Cheesecake Factory earned $1.01 a share for all of fiscal 2007. Its guidance implies that profits will clock in between $1.11 and $1.16 a share this year. If the days of heady growth are over at the company, shares may not necessarily be a bargain now at 17 times earnings.    

I say that with a heavy heart because I've owned shares of Cheesecake Factory for several years now. I bought it for my son to get him excited about the stock market. He's a fanatic for the chain's Cajun Chicken Littles. Now I feel like Chicken Little as I'm trying to find better opportunities.

The thing is, I don't even have to leave the casual dining sector to find stocks that offer more compelling values. Let's explore three alternatives and some of their forward earnings numbers.

2008

EPS Growth

2008

P/E

CBRL Group (Nasdaq: CBRL)

10%

11

Buffalo Wild Wings (Nasdaq: BWLD)

23%

18

Darden (NYSE: DRI)

6%

10

Source: Yahoo! Finance.

CBRL is the parent of the Cracker Barrel Old Country Store eateries that dot the highways. The company is a survivor, despite fears that higher fuel prices would eat into the stops at a Cracker Barrel for some comfort food and a look at rustic trinkets available at the attached stores.

Buffalo Wild Wings is trading at a marginally higher forward earnings multiple, but it's looking to grow twice as fast. The chicken wings specialist is a popular Motley Fool Hidden Gems recommendation, and I know I can't be the only potential shareholder intrigued by seeing a profit growth rate that is higher than its earnings multiple.

Darden is the company behind the Olive Garden and Red Lobster chains. If the 6% growth rate is uninspiring, let me sweeten the pot. The company's fiscal year ends in May. Earnings for fiscal 2009 are expected to grow a little better than 10%. Based on next fiscal year's profit target -- and again, this is a fiscal year that begins in less than four months -- Darden is trading at just nine times that target (as opposed to a still-attractive multiple of 10, based on this year's estimates).

I may not bail on Cheesecake Factory right away. Maybe I'll wait to see if it has a P.F. Chang's (Nasdaq: PFCB) on its hands with the Asian bistro concept. I also already own shares in Cracker Barrel's parent company. However, with so many tempting alternatives in today's market, you're doing yourself a major injustice if you don't explore the opportunities.

Yes, no matter how tasty that Godiva cheesecake may be.

Fill your plate up with more Foolishness:

Starbucks is a Motley Fool Stock Advisor recommendation. For 30 days, you can check out any of our newsletter services for free. The Motley Fool owns shares of Buffalo Wild Wings.

Longtime Fool contributor Rick Munarriz is a fan of the crusted chicken Romano at Cheesecake Factory, the caramel chicken at Grand Lux, and the grilled panini sandwiches at CF Express. He owns shares in Cheesecake Factory and CBRL Group. He's also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$122.39 (-2.44%) $-3.06
Buffalo Wild Wings, Inc. Stock Quote
Buffalo Wild Wings, Inc.
BWLD
Cracker Barrel Old Country Store, Inc. Stock Quote
Cracker Barrel Old Country Store, Inc.
CBRL
$98.22 (-4.88%) $-5.04
The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
$28.43 (-2.44%) $0.71
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$84.17 (-0.63%) $0.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

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