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5 Reasons to Add Cheesecake Factory to Your Portfolio

Zacks Equity Research

While the restaurant industry is struggling through its worst year since the end of recession, there are some big players that seem to be unperturbed by the plight. The Cheesecake Factory Inc. CAKE is one such company. This Zacks Rank #2 (Buy) rated company has good prospects and should make a value addition to your portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings & Revenue Growth

The Cheesecake Factory makes for a great pick in terms of Growth investment. Arguably, nothing is more important than earnings growth as surging profit levels is often an indication of strong prospects (and stock price gains) ahead for the company in question.

While Cheesecake Factory has put up a historical EPS growth rate of 20.0%, compared with the industry average of 11.2%, investors should really focus on the projected growth. Here, the company is looking to grow at a rate of 19.5%, thoroughly crushing the Zacks categorized Retail-Restaurants industry’s average, which calls for EPS growth of just 10.6% in comparison.

Propelling the earnings forward is the company’s solid revenue growth story. Its last five years revenue growth stands at nearly 5%, in line with the industry’s average. However, the projected sales growth for the current year stands at 7.9%, while the broader industry’s estimate stands at 3.6%, which is less than its half.

Notably, the company’s restaurants have posted positive comps in 27 consequent quarters. Its differentiated menu, operational distinction and unique ambiance appeal to the customers. Going forward, various initiatives to boost sales and traffic volume like menu innovation, roll-out of an improved server training program, launch of mobile payment app and increased focus on delivery service, should aid in keeping up the trend of positive comps.

For all these reasons the company currently has a Growth Score of ‘B’ on our style score system that helps us to identify potential outperformers.

Valuation Looks Rational

The Cheesecake Factory has a Value Style Score of ‘A.’ The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount.

The company is currently trading at a trailing 12-months P/E multiple of 22.73x while the industry’s average stands at 30.39x. Moreover, its forward P/E also stands lower at 21.65x compared to the industry’s average of 22.98x.

Looking at the sales of the company, the company is currently trading at a P/S ratio of 1.28, lower than the industry average of 1.32.

All these ratios deem the company undervalued in comparison to its industry peers and indicate a good time to buy.

Stock Price & Other Returns

Shares of The Cheesecake Factory have returned over 33% year-to-date, widely outpacing the industry, which grew less than 2% in the same time frame. While any stock can see a spike in price, it takes a real winner to consistently outperform the market. We noticed that Cheesecake Factory has outperformed the industry in all of the time frames we considered – 4-week, 12-week, 52-week as well as year-to-date.

Moreover, the Return on Equity delivered in the trailing 12 months was an impressive 22.8%, while the industry returned 8.2%. Going forward, the company is evaluating different approaches to limit its costs. Amid the current soft environment, such efforts to control costs would help to improve margins and thereby perk up returns.

Remarkably, Cheesecake Factory continuously returns wealth to shareholders via dividends and share repurchases. The company has continuously paid quarterly dividends since it announced its first dividend in 2012 and has hiked it four times since then.

Earnings History and Future Estimates

The Cheesecake Factory has beaten earnings estimates in each of the trailing seven quarters, with an average beat of 10.84% in the last four quarters. After reporting robust third quarter results in October, the company upped its full-year 2016 earnings per share and comps outlook.

Furthermore, upward estimate revisions reflect optimism in the stock’s prospects. Analysts have bumped up their earnings estimates for 2016 and 2017 by 3.3% and 3%, respectively, over the past two months.

Low Beta Stock

A stock with beta less than 1 suggests that the price movement of the stock is not highly correlated with the market. Since they are less volatile than the market, they are safer bets at the moment. The Cheesecake Factory has an impressive beta of 0.2. Adding it to your portfolio brings down your portfolio’s overall beta, thereby reducing its risk.

Bottom Line

Cheesecake Factory is one of the most recognized upscale casual restaurants operating in the U.S. Its differentiated menu, operational distinction and unique ambiance appeal to customers.

However, investors should be cautious of higher labor costs, pre-openings costs and expenses related to sales initiatives that could hurt the company’s margins. A challenging sales environment is hurting most restaurateurs including Brinker International, Inc. EAT, YUM! Brands, Inc. YUM, Darden Restaurants, Inc. DRI, to name a few.

Nevertheless, given the company’s solid comps performance compared to its peers as a result of the brand’s strong consumer affinity, the stock should keep performing well in the quarters ahead.

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