The company generated free cash flow of $30 million in Q1. The company repurchased shares worth $42 million. All that free cash flow could be used to up the yield or invest even more in international growth and acquisition. It could also be used to pay down debt but the debt ratio at .94 isn’t that bad compared to many restaurant chains.
Threats
Its main threat is competition in the form of much larger rivals, Brinker International, Inc. (NYSE:EAT) and Darden Restaurants, Inc. (NYSE:DRI). Brinker owns and operates or franchises 1,540 Chili’s and 45 Maggiano’s Little Italy restaurants in 31 countries. Brinker has an 18.27 trailing P/E with a PEG of 1.23.
Analysts predicate a Brinker five year EPS growth rate of 13.60% on further international expansion. Overall, analysts are positive on Brinker International, Inc. (NYSE:EAT) with 3 Strong Buys, 10 Buys, 4 Holds and 1 Underperform. They also give a median price target of $44.00.
Darden owns 2,100 restaurants in the US and Canada with its best known and largest franchises being Olive Garden and Red Lobster. These are also the ones seeing the slowest sales growth. The company has been closing some Olive Gardens and beefing up its specialty restaurant group with the acquisition of 41 Yard House locations. The expansion of the specialty restaurant group is the more likely threat.
Darden Restaurants, Inc. (NYSE:DRI) reported Q4 earnings on June 21 and missed on EPS, beat on revenue, and margins decreased across the board. They also guided a 3-5% decline in diluted net EPS for the year. Despite a 16.25 trailing P/E analysts are bearish with 17 holds, 1 Sell, 1 Underperform, 5 Strong Buys, and 1 Buy.
Commodity prices for over 200 menu items are always a concern. In the Q1 call commodity inflation was predicted to be 2.5% for 2013 compared to last year’s 3%.
Cheesecake Factory may suffer from the same casual dining downtrends that Morgan Stanley cited to downgrade Brinker International, Inc. (NYSE:EAT) from Overweight to Equal Weight on June 26.
The Foolish CAKEaway
Penny might do well to get a promotion and some stock but if she can buy Cheesecake Factory on a market downturn she could see a lot more long term value and finally look like a genius to physicist friends Leonard and Sheldon.
The Cheesecake Factory Incorporated (NASDAQ:CAKE) has many more strengths than weaknesses and opportunities abroad galore. It is performing better than ten times larger rivals Brinker and Darden Restaurants, Inc. (NYSE:DRI) as a stock and as a company with cost containment and margin expansion.
The article Dig in to This “Penny” Stock: A SWOT Analysis originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants (NYSE:DRI). AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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