Cramer's take on private equity eating Cheesecake (Factory)

Jim Cramer's "private equity buyout target" tonight was Cheesecake Factory (NASDAQ:CAKE). He doesn't care that the company is up 10% after earnings and he doesn't think it is too late to get on board. He likes that the cash flows aren't living up to their potentials. He thinks this would be easy to turn around. CAKE can actually raise its prices because they are low for quantity and quality. Privateers could bolster its supply side, do a little more brand promotion via advertising, add more stores and close underperforming stores. In addition to looking attractive to private equity, the Cheesecake Factory CEO is the son of the company's founders and the shares should be a lot higher.

Cramer did claim that he is practicing "sane investing in an insane world" and he stressed to only buy companies that you want to own anyway. So at least he specified this after a couple nights of forcing the goo-goo-ga-ga love for buyouts the last two nights. Thankfully, he restated that tonight. You HAVE TO like a stock you buy for the fundamentals (or at least the technicals) instead of just for a buyout pick. The one thing that is funny about this pick is that I was doing some work on this one for my own reviews of it as a buy on its own, without being a buyout potential. I also determined it could raise prices, like Cramer noted, but I thought of something else as well. Food is a huge portion of a restaurant's operating costs, and if you have ever ordered an entrée at Cheesecake Factory or at Grand Lux you will agree (even if Cramer didn't note it) that these entrees are way too large for one person. CAKE could easily trim 5% to 10% off of its portions and not change prices. The savings would go 100% to the bottom line.

As far as the other data, the 23.6 forward P/E ratio isn't cheap and the 12-times cash flows isn't dirt cheap. But a revved-up management team could easily fix both of these. Both the hallmark Cheesecake Factory and the Grand Lux are better brands than others and these restaurants are rarely operating without being full, from my own personal experience. So if you make the argument that prices can be hiked and it can chop costs, then it's actually possible and the numbers could be far better than they have been.

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.