California Pizza: A restaurant play that's definitely not for rookies

Posted May 15th 2009 5:00PM by Joseph Lazzaro
Filed under: Calif Pizza Kitchen (CPKI), Stocks to Buy

A restaurant chain stock? In this economy? Admittedly, the sector is replete with high-risk plays, but an impressive upside is possible, with the correct business model, And with the aforementioned in mind, California Pizza Kitchen (NASDAQ: CPKI) is worth a review.

California Pizza Kitchen offers a casual dining experience for the 'premium pizza' segment, but also features pastas and salads.

The company has had a slow new store opening philosophy that's historically not favored by Wall Street, but in this 'really challenged' retail environment – characterized by the 'frugal consumer' – that stance may ultimately not hurt the company that much: it might even turn out to be a blessing in disguise.

To be sure, macroeconomic headwinds will continue to weigh on restaurant traffic, but the argument forwarded here is that the California Pizza's unique ingredient formula --- it tries flavor combos other don't --- and its ability to spot food trends, will spark a quicker bounce-back as the U.S. economy starts to recover. The First Call F2009 / F2010 EPS estimates for CPKI are 70 cents / 81 cents.

Still, in deference to the devastation that a recession can visit on the restaurant chain sector, a tight Stop Loss has been deployed: we're not going to tolerate any nonsense if the U.S. economy does not give California Pizza's shares at least a fighting chance.

Stock Analysis: California Pizza Kitchen is a high-risk stock. Consider buying a 25% position in CPKI now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your CPKI position in the first half of 2009. Sell / Stop Loss if you were to buy shares in this company: $9.50.

- -

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Print this