Restaurant Finance Monitor
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Don’t believe your eyes or your checking account. The surprisingly good US jobs report last Thursday, 250,000 higher than expected, was entirely due to over 500,000 new part time jobs, hardly any new full-time jobs. Though US inflation is ticking down, month by month, prices are rising materially faster abroad. Since we import more than we export, that alone will push US prices upward. In terms of deficits: Pre-Covid, in the FY ending 9/30/19, the stated annual operating deficit was $984B and the debt in the US increased by $1.2T (the difference: from the Social Security trust fund). Covid driven deficits spiked higher in ’20 and ’21, started coming down in ’22 as Covid abated. Presumably more normalized now, the deficit in the current year ending 9/20/23 is estimated to be about $1T. The debt, $31.5T as of 2/9, is therefore up about $700B in a little over four months, so will likely be well in excess of the (questionable) $1T deficit estimate. Summarizing, only relative to the bloated Covid numbers has the current administration “brought the deficit down”.

Strike Up the Band? – So far in ’23, the stock market has rebounded off the lows last year that were driven by sluggish economy and higher interest rates, with tax loss selling in December increasing the damage. Recalling that “when the music plays, Wall Street dances”, several potential restaurant IPOs are starting to surface. Panera’s (potentially including Caribou Coffee and Einstein Bros. Bagels) is supposedly in the wings. Panera’s was taken private, for $7.5B in 2017 by JAB Holding, and co-founder, Ron Shaich moved on.  Recall that a potential “relationship” between Panera and Danny Meyer’s SPAC was terminated in mid-’22 so the Panera band is tuning up again.

Speaking of Ron Shaich, his $300M investment fund, Act III Holdings, has an important stake in “Cava”, which has apparently “filed confidentially” for an IPO. Founded in 2011, Cava attracted Shaich’s capital in or around 2017, as he stepped aside from active management at Panera. Yet to be disclosed is whether the public company will include Zoe’s Kitchen, which Cava Group purchased in 2018 for $300M. In April, 2021, Cava Group raised $190M, from a group led by T. Rowe Price, reportedly reflecting a valuation of $1.3B. It’s been reported that Cava Group has raised a total of $640M since 2015.

Another pending IPO is that of Fogo de Chao’, with a great deal of information already available since their first filing last summer. Market conditions late last year were clearly not conducive to completing the transaction, in spite of the strong Company fundamentals. It didn’t help that a number of other recent IPOs, priced in retrospect too high, had corrected materially in the meantime. We have mentioned Fogo in this column and written extensively on our website, and Fogo seems to be one of the best positioned casual dining chains to provide a differentiated dining experience. With stores generating about the highest cash on cash returns of any large chain, there is no shortage of “white space” for growth. This column is not intended to make buy and sell recommendations, but, depending on valuation, pay close attention to Fogo de’ Chao when it starts to trade.

Starbucks reported earnings last week for their December quarter. The subject here is “valuation” They missed EPS guidance for the quarter, for good reasons mostly China related, and maintained guidance for the year. Howard Shultz, the legendary founder, and still their best cheerleader, kicked off the conference call with a compelling description of all the opportunities ahead.

We all can agree that Starbucks has been, and hopefully will continue to be a growth stock. The faster the Growth, the higher can be the Price/Earnings multiple. A good guidepost is that a reasonable PEG  (Price/Earnings divided by Growth Rate) is no more than 2:1. For example, If a company is growing at 10% per year, a P/E of 20x expected earnings is reasonable. 1:1 is better, of course, because there is lots of room for expansion of the P/E.  Productive as Starbucks has been, they do not grow today as rapidly as 20 and 30 years ago In fact, over the last four years operating earnings have grown just over 4%, still under 5% in the seven years ending 9/30/22. If we add in years nine and ten, 2012 and 2013, which grow at about 24%, the ten year growth rate moves up to 7%. SBUX at 109, with consensus earnings for Y/E Sept’24 around $4.00/share and a 4-5% growth rate has a very rich PEG of about six over seven years and even considering the 7% growth rate over the last 10 years a PEG of four. Based on growth rate over the last ten years, this is a very expensive stock.

There is, however, the possibility that the growth rate in the future could accelerate to a rate that could justify a P/E multiple of 27x ’24 EPS. The stock today would be fairly valued if the future growth rate is at least 13.5%. Judge for yourselves this possibility.