The Cheesecake Factory: A decent menu in a lamentable sector

Posted Jun 26th 2009 5:30PM by Joseph Lazzaro
Filed under: Cheesecake Factory (CAKE), Stocks to Buy

It goes without saying that, in general, I believe one of the worst American inventions has been the restaurant chain. Chains represent a vast wasteland, from a culinary standpoint, along with other shortcomings. The citizens of France wonder how Americans tolerate such horrible dining options. Comment les Américains tolèrent de tels aliments? Moreover, in the U.S.'s 'frugal consumer' era, several chains are destined to close.

But one or two chains represent an exception to the above, and The Cheesecake Factory (NASDAQ: CAKE) is one. Here's why:

The Cheesecake Factory has managed to successfully merge upscale and casual dining, while offering a relatively fresh-food menu with American and international selections. Recent traffic has been hurt by the recession, but the bottom line here is that CAKE will be a survivor, and justifiably so, in a sector that's contracting: a decade of over-spending by Americans means there is no strong rebound coming in the restaurant chain sector, period.

Those fundamentals, combined with the fact that CAKE has room to grow in many U.S. markets, make the stock a Buy for investors who can tolerate moderate-risk, but do note the tight Sell/Stop Loss. The First Call FY2009/FY2010 EPS estimates for CAKE are 77 cents to 92 cents.

Stock Analysis: The Cheesecake Factory is a moderate-risk stock. Consider buying a 25% position in CAKE now; then buy another 2% in four months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your CAKE position before October 2009. Sell/Stop Loss if you were to buy shares in this company: $9.50.

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

Tags: chains, cheesecake, cheesecake factory, CheesecakeFactory, restaurants