Ideas for the next market-beating investment are everywhere. To build on a recent article discussing potential opportunities in the fast casual dining market, the restaurant industry is filled with stocks that famed investor Peter Lynch would suggest that the average investor could enjoy more success than large institutions. After all, a person can learn a lot of great information simply by sitting down for a meal at a restaurant. Food quality, service, customer traffic, and overall experience are great qualitative indicators of whether a restaurant may be worth consideration for investment. If the experience is good, it is time to look more closely at the financials.
Small cap, large opportunity
For an investor that is seeking market beating returns, it makes sense to start the search with smaller companies. In the restaurant industry, this would include companies that have a limited geographic footprint or a single brand concept. This article will look at the following small-cap restaurants and discuss some preliminary observations for potential investors:
- BJ’s Restaurants, Inc. (NASDAQ:BJRI) – BJ’s operates pizza and brewhouse-focused restaurants under the BJ’s brand. Since its founding in California, the company has expanded to 136 locations in 15 states.
- Bravo Brio Restaurant Group, Inc. (NASDAQ:BBRG) – Bravo operates 46 BRAVO! restaurants, 56 BRIO restaurants, and one Bon Vie restaurant in 31 states that focus on Italian food.
- Chuy’s Holdings Inc (NASDAQ:CHUY) – Chuy’s originated in Texas and operates 45 Tex Mex restaurants in 12 states.
- Del Frisco’s Restaurant Group Inc (NASDAQ:DFRG) – Del Frisco’s operates 35 high-end steak houses under the Del Frisco’s and Sullivan’s names. Since its founding in Texas, Del Frisco’s has expanded to 19 states and Washington D.C.
- Ignite Restaurant Group – Ignite owns or franchises 205 Romano’s Macaroni Grill restaurants as well as 134 Joe’s Crab Shacks and 16 Brick House Taverns + Taps.
| BJRI | BBRG | CHUY | DFRG | IRG | |
|---|---|---|---|---|---|
| CAPS rating (out of five stars) | 4 stars | 2 stars | 1 star | N/A | 4 stars |
| Market capitalization (in millions) | $886 | $300 | $580 | $438 | $388 |
| Number of locations | 136 | 103 | 45 | 35 | 355 |
| Debt to equity ratio | 0.00 | 0.15 | 0.05 | 0.00 | 0.99 |
| TTM price to earnings ratio | 29.63 | 20.69 | 63.03 | 32.68 | 420.00 |
| Forward price to earnings ratio | 24.54 | 15.62 | 41.82 | 16.88 | 23.26 |
| Five year expected growth rate | 17% | 12% | 25% | 20% | N/A |
| PEG ratio | 1.70 | 1.52 | 2.03 | 1.06 | N/A |
| Source: Yahoo! Finance-9/7/13 |
The ability for each of these companies to grow the number of locations provides significant opportunity. For example, BJ’s Restaurants, Inc. (NASDAQ:BJRI) management expects that it can reach 425 locations across the country. The company just began expansion into Florida, and has not opened a single location elsewhere on the east coast; as a result, tripling the number of locations seems quite reasonable when you consider the tremendous market size of states such as New York, Pennsylvania, and Virginia.
By comparison, Darden Restaurants, owner of a portfolio of restaurants including Olive Garden and Red Lobster, operates 2,100 locations. As a result, even 425 locations should by no means be considered a ceiling for a company like BJ’s Restaurants, Inc. (NASDAQ:BJRI).
Thoughts on valuation
Each investor has different criteria for an appealing investment opportunity. In the table above, the debt to equity ratio is a popular way to assess the strength of a company’s balance sheet. It also provides insight into whether the company has funded past growth with earnings or debt. Each of the companies discussed in this article has a manageable amount of debt, but Ignite’s $105 million in debt does limit the company’s flexibility more than the other companies.
