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Cheesecake Factory (CAKE), first discussed here on June 25, 2009, at a price of $16.30, has raced ahead. My initial inclination would be to take the roughly 65% gain, but several fundamentals override that stance.The primary reason to hold on to CAKE? The U.S.'s "frugal consumer" era has hit the restaurant sector hard, and there will be many chain restaurant casualties, but I don't think Cheesecake will be one. Don't expect anything spectacular from CAKE in FY2010 -- just flattish to slightly higher same store sales -- and only a slight increase in revenue, with most likely a net zero increase in restaurants operated.
That's not something to write home about, but at the retail/restaurant chain end of the spectrum, survival is 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 CAKE. And that's the essence of the play: a decent restaurant chain left standing as the economic expansion accelerates.
The First Call FY2010/FY2011 EPS estimates for CAKE are $1.25 to $1.44.
Technically, Cheesecake's shares are a tad overbought, so I would wait for a pull-back to $25-$26 before considering a play.
2010 Outlook: I view Cheesecake as a long-term play, but if investors are looking to sell CAKE within the year, I wouldn't buy the shares, as the 1-year risk/return is not favorable.
Stock Analysis: I consider Cheesecake Factory to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If you haven't, and you plan to hold CAKE more than a year, consider a 25% position, and I'd put a sell/stop loss at $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.
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