Our database of insider trading filings shows two members of The Cheesecake Factory Incorporated (NASDAQ:CAKE)’s Board of Directors bought shares in the past week. David Pittaway directly purchased 1,000 shares while a trust connected to Herbert Simon bought 20,000 shares; these purchases generally took place between $34 and $35. Studies show that insider purchases are bullish signals, while stocks bought by multiple insiders are particularly likely- though not certain- to outperform the market (read more about studies on consensus insider purchases). This makes sense to us, as economic theory predicts that without a strong opinion of the company insiders should prefer to diversify their investments and so actual purchases- particularly consensus purchases- imply confidence that the stock price will rise. Simon had been making several insider purchases last summer at prices of about $30, and then more at around $33, though Cheesecake Factory has actually underperformed the market since those buys.
Revenue was up 3% in 2012 compared to 2011, as a result of comp sales growth of 2% (in line with comp growth rates in the last two years) and a net addition of locations. Earnings were up 3% for the year as margins remained fairly constant, though EPS grew 9% as The Cheesecake Factory Incorporated used about $100 million of cash to repurchase shares. The company was able to fund these buybacks, a modest dividend (the current yield is 1.4%), and about $90 million in capital expenditures almost entirely through its cash flow from operations. We would note that the fourth quarter results were not good with revenue down slightly versus a year earlier and earnings falling 26%.
The Cheesecake Factory Incorporated does not have much of a following among hedge funds and other notable investors that we track in our database of 13F filings. This is somewhat significant to us since small-cap stocks such as this can be particularly rich sources of alpha for hedge funds if they are undervalued. We have actually found that the most popular small cap stocks generate an excess return of 18 percentage points per year on average (learn more about our small cap strategy). The largest position in Cheesecake Factory among the filers we track belonged to billionaire Mario Gabelli’s GAMCO Investors, which reported a position of 1.1 million shares (see Gabelli’s stock picks).
Let’s look at other restaurants:
As a table service restaurant Cheesecake Factory is best compared to peers such as Darden Restaurants, Inc. (NYSE:DRI), Brinker International, Inc. (NYSE:EAT), DineEquity Inc (NYSE:DIN), and Bloomin’ Brands Inc (NASDAQ:BLMN). These companies’ respective well-known brands include Red Lobster and Olive Garden; Chili’s; Applebee’s and IHOP; and Outback Steakhouse. Most of these stocks are cheaper on a trailing earnings basis; DineEquity and Darden’s P/Es are 10 and 13, while Brinker is valued at 17 times its trailing earnings. Darden’s most recent quarter showed a 37% decline in net income versus a year earlier despite higher revenue, while Brinker reported modest growth rates on both top and bottom lines. These three companies joined quick service restaurants such as McDonald’s Corporation (NYSE:MCD) in our list of the most popular restaurant stocks among hedge funds for the fourth quarter of 2012 (see more of the ten most popular restaurants among hedge funds). Bloomin’ Brands is priced for growth with a trailing P/E of 39, and its earnings have not been good recently. Analysts expect it to recover, and the forward P/E is only 13, but we would be skeptical of their optimism. Overall we would say that Cheesecake Factory doesn’t seem cheap for its industry, and we would at least want to dig into what problems it experienced in Q4 before deciding if it is worth its premium to other restaurants.
Disclosure: I own no shares of any stocks mentioned in this article.
