After a recent visit to the local Chuy’s Holdings Inc (NASDAQ:CHUY) restaurant, it became clear that the company is on a successful path. Even arriving after 1pm for lunch, the restaurant had a five-minute wait, an unheard of scenario in this area. The most disappointing part of the lunch was missing that the stock went public last summer and has already gained more than 170% before even putting together the connection.
Maybe the best part of the location is that the store is only a stone’s throw away from a Chipotle Mexican Grill, Inc. (NYSE:CMG) and a Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) is right down the street, yet the restaurant was packed for a lunch. Not to mention, the general location has dozens of other restaurants including other Mexican options suggesting Chuy’s Holdings Inc (NASDAQ:CHUY) is offering the right combination of good food at an attractive price. The main question is whether the company can expand beyond its mostly Texas locations to command a higher valuation.
Plenty of expansion
The Austin, TX based operation only has 42 full-service restaurants across nine states offering plenty of options for growth. While revenue surged nearly 25% during the first quarter, the total only reached $47 million. As an example, Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) expects to reach quarterly revenue of nearly $240 million as it has 474 locations.
Chuy’s Holdings Inc (NASDAQ:CHUY) expects to add eight to nine new restaurants for the year providing for substantial growth considering only two were opened during Q1. Worth noting is that only 27 restaurants qualified for the comparable sales calculation during Q1 so the existing store base is still relatively new as well.
Exiting shareholders
A major concern has to be the willingness of existing shareholders to unload stock this year. In two separate offerings, selling shareholders unloaded at least 8,175,000 shares with an option for another 450,000 shares.
The April offering didn’t hold the stock back as the most recent offering for 3 million shares priced at $33. That price is considerably below the current price around $40. The previous offering in January was incredibly priced at only $25.
In total, these shareholders unloaded roughly 50% of the company for over $200 million. On one hand, it has to be seen as a negative that the insider fled, but on the other hand the stock no longer faces massive insider sales as the majority of the stock is now in the public float.
Chipotle or Red Robin path
For restaurants, it can be difficult to find comparative public stocks for analysis. In this case, Chipotle Mexican Grill, Inc. (NYSE:CMG) offers a view of a Mexican chain with a somewhat similar price point while Red Robin offers a similar full-scale restaurant. Both are even more compelling considering the close location with the visited restaurant. These two stocks also offer glimpses of what happens when growth paths create different outcomes.
Though Chipotle Mexican Grill, Inc. (NYSE:CMG) offers more of a fast-casual Mexican concept than a full-service restaurant, it does offer insight into what the valuation of a successful operation can maintain. In the latest quarter, the company had 1,458 stores with revenue growing 13% to $727 million. More importantly, the stock has been able to maintain a multiple of over 3 times revenue even with a valuation of $11 billion. Revenue growth expectations remain strong at over 15% during the next couple of years. The stock maintains a relatively high forward multiple of 28 times estimates and during the heyday of growth it had valuations comparable to that of Chuy’s Holdings Inc (NASDAQ:CHUY) that sits around 48 now.
As mentioned above, Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) though more of a burger joint competes in the same general areas for a similar customer price point. Chuy’s Holdings Inc (NASDAQ:CHUY) though hopes to not take the same path as Red Robin. The burger joint saw its stock max out back in 2005 at over $60 and is only now re-approaching that level eight years later. Though Red Robin has nearly 10 times the store base it has a similar market cap. With revenue expected to exceed $1 billion this year, the concept only trades at a market cap of $764 million and actually trades at an expensive forward multiple of 21 times.
Bottom line
Any investors discovering Chuy’s Holdings Inc (NASDAQ:CHUY) back around the IPO price are probably celebrating at the current prices and maybe even unloading stock like the shareholders from the secondary offerings. For other investors decisions have to be made as to whether the company will take the growth path similar to Chipotle or max out like Red Robin did at these valuation levels. The exiting shareholders clearly think the valuation could be maxing out even though the company only has stores in nine states with significant growth opportunities ahead. Investors might be wise to load up on dips, but it’s very noteworthy that the stock hasn’t dipped at the end of June during the taper tantrum selloff.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Red Robin Gourmet Burgers. The Motley Fool owns shares of Chipotle Mexican Grill. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is Chuy’s (NASDAQ:CHUY) Worth a Bite? originally appeared on Fool.com is written by Mark Holder.
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