The PEG ratio is a great way to measure the current valuation of a company relative to its current earnings and growth estimates in a single data point. This metric relies on analyst estimates for future growth, so is by no means perfect; however, it is a good starting point to understanding whether a stock is cheap or not. Based on this metric, BJ’s Restaurants, Inc. (NASDAQ:BJRI) and Chuy’s Holdings Inc (NASDAQ:CHUY) seem a bit expensive with ratios of 1.7 and 2.0, respectively.
A compelling opportunity
The one stock in this group that stands out is Del Frisco’s Restaurant Group Inc (NASDAQ:DFRG). The company has no debt and is expected to grow at 20%, yet it trades at just 17 times next year’s earnings. Plus, with just 35 locations there is tremendous room for growth; in the most recent quarterly results, management increased its growth guidance to include six new locations during 2013.
In addition to a huge growth opportunity and a reasonable valuation, there’s another aspect to Del Frisco’s that Peter Lynch would love: the company is followed by so few people that it hasn’t even earned a rating in Motley Fool CAPS with just nine picks at the time of this article. By comparison, BJ’s Restaurants, Inc. (NASDAQ:BJRI) has roughly 500 CAPS picks.
There are of course a few risks to understand. First, Del Frisco’s operates high-end steakhouses. This market has stiff competition from brands such as Ruth’s Chris, Flemings, Morton’s, The Palm, and others. Second, the pricey nature of Del Frisco’s meals limits the number of markets that can support a successful location; these locations will likely be limited to affluent areas in large cities. As a result, there should be no illusions that the company’s ceiling can be measured in thousands of locations; several hundred is all that should be expected.
Even with these risks, Del Frisco’s is a compelling investment opportunity today given its growth potential and reasonable valuation. To measure this “buy” recommendation, I will initiate an outperform CAPScall.
Take a test drive
For investors that live near one of the brands mentioned in this article, some of the best research can be derived from an actual trip to the restaurant. As mentioned above, the overall experience can speak volumes regarding the strength of the restaurant concept and the potential to expand the concept nationally.
This firsthand experience dining at one or more of the concepts owned by each of these companies helped me arrive at the conclusion that Del Frisco’s is worth further consideration; the food and customer experience are great whether it is a dinner for two or a large corporate event, and I’d argue that the overall experience is better than the competition.
The article How to Make Money off Your Next Meal originally appeared on Fool.com and is written by Brian Shaw.
Brian Shaw has no position in any of the stocks mentioned in this article. The Motley Fool recommends BJ’s Restaurants. The Motley Fool owns shares of BJ’s Restaurants and Darden Restaurants.
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