Cheesecake Factory Can Handle the Coronavirus Storm, Says Analyst


Are restaurant stocks currently a good buy?

While the question might sound ridiculous, as dining establishments around the world have closed doors, a number are at bargain basement prices and could represent a unique investing opportunity. Especially those with enough cash in the pantry to see them through the pandemic.

Which brings us to the Cheesecake Factory (CAKE). Shares of the restaurant chain are down by a gut wrenching 52% year-to-date, but CAKE has just secured a timely investment. Equity firm Roark Capital has just purchased $200 million of preferred CAKE shares along with a place on the board. Roark is an increasingly active player in the industry and over the last decade has invested in over 75 brands including Buffalo Wild Wings, Arby’s and Cinnabon. It now has a restaurant portfolio generating over $40 billion in annual sales.

Following the deal, William Blair’s Sharon Zackfia reckons that at the current cash burn rate (estimated at approximately $2.5 million per week), the Cheesecake Factory has enough liquidity to see it through 2021.

“With $58 million in cash on its balance sheet as of year-end 2019, the draw-down of $90 million from its revolver, and today’s $200 million capital raise, we estimate that The Cheesecake Factory has over $300 million in cash,” Zackfia said.

CAKE saw comparable store sales drop by 46% in March, bringing quarterly comparable store sales roughly 13% into the red. The company has also furloughed 41,000 hourly workers until further notice.

But Zackfia believes CAKE is well set up for a post coronavirus world. The analyst said, “While today’s environment is creating unprecedented challenges across the restaurant industry, we expect The Cheesecake Factory to survive and see value from 7.0 times our 2021 EBITDA estimate, particularly as the competitive environment is likely to prove more favorable for casual dining concepts in the aftermath of coronavirus given likely mass restaurant closures in the full-service dining space.”

Accordingly, Zackfia reiterated an Outperform (i.e. Buy) on CAKE without suggesting a price target. (To watch Zackfia’s track record, click here)

The rest of the Street remains more cautious. Based on 10 Holds, 3 Buys and 2 Sell ratings, the analyst consensus recommends a Hold on CAKE for now. The bulls have the edge, though, as the average price target is $25.08 and implies potential upside of 33%. (See CAKE stock analysis on TipRanks)

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