Cheesecake Factory Is in an Uptrend

Posted Dec 27th 2009 4:20PM by Joseph Lazzaro
Filed under: Cheesecake Factory (CAKE), Stocks to Buy

Cheesecake Factory's (CAKE) stock has broken out of a trading range, and that's one major reason I'm reiterating my buy rating for the company's shares, first recommended on June 25, 2009, at a price of $16.30.

The U.S.'s frugal consumer era has hit the restaurant sector hard, and there will be many chain restaurant casualties, but Cheesecake won't be one. Don't expect anything spectacular from CAKE in FY2010 -- flattish to slightly higher same-store sales, and only a slight increase in revenue, with most likely a net zero increase in restaurants operated.

The aforementioned doesn't sound like much, but at the retail/restaurant chain end of the commerce spectrum, survival is the name of the game during these economic conditions, and Cheesecake Factory will. Further, if U.S. GDP growth outperforms in 2010, that will invariably mean a resumption of job growth, with increased traffic for Cheesecake Factory. And that's the essence of the play: a decent restaurant chain left standing as the economic expansion accelerates.

Cheesecake Factory has managed to successfully merge upscale and casual dining, while offering a relatively fresh-food menu with American and international selections. The company has done a better-than-average job at containing costs. The First Call FY2009/FY2010 EPS estimates for CAKE are $1.00 to $1.10.

Technically, as noted, Cheesecake's stock chart has broken out of a $17 to $20 range it was in for four months, and also cleared $20 resistance in the process. However, the stock is overbought short-term, hence buy CAKE on a pull-back to $21 or $22, if given the chance.

Stock Analysis: Cheesecake Factory is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in CAKE on a pull-back to $21 to $22; keep in mind that CAKE's shares may not retreat. Then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your CAKE position before February 2010. 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: CAKE, Cheesecake Factory