Cheesecake Factory: The No-Compromise Menu Is Succeeding

Posted Jun 16th 2010 5:30PM by Joseph Lazzaro
Filed under: Cheesecake Factory (CAKE), Stocks to Buy

Readers of this space know that restaurant chains are opposed, for several reasons. However, every once in a while a chain forms that exceeds the segment's lamentable cuisine offerings, and still manages to make a buck.

The Cheesecake Factory Incorporated (CAKE), first discussed here on June 25, 2009 at a price of $16.30, is one.

The best financial reason to hold on to CAKE? The U.S.'s 'frugal consumer' era has hit the restaurant sector hard, and there will be restaurant chain casualties, but Cheesecake won't be one. Don't expect anything spectacular revenue-wise from CAKE in FY2010 -- flattish to slightly higher same store sales, and only a slight increase in revenue, with most likely a grand total of three -- count 'em, three -- new restaurants opened under its upscale casual dining format.

The above is not something to write home about, but at the retail/restaurant chain end of the spectrum, survival is the name of the game under these economic conditions, and Cheesecake Factory will. Further, if U.S. GDP growth outperforms in 2010, that will invariably mean increased traffic for CAKE. Moreover, a likely decline in food costs/ingredients should assist the bottom line. 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 $1.37 to $1.58. Each EPS looks about 5% low, according to my analysis.

Technically, Cheesecake's stock has retreated about $5 recently after racing ahead to clear $30 resistance earlier this spring. But the dip not come close to the 200-day moving average, and a bottom appears to be in-place at/near $24, hence look for CAKE's uptrend to continue.

2010 Outlook: I view Cheesecake Factory as a long-term play, but if investors are looking to sell CAKE within the year, it's probably best to take your profits after it rises to $32-34, if it fails to rise above $35.

I'd also raise the sell/stop loss to $17 from $9.50, making this a zero-risk trade for your June 2009-bought shares.

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 not, I'd consider buying a 50% position in CAKE now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 50% of my CAKE position before August 2010 and I'd put a sell/stop loss at: $17.

- -

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

Tags: cheesecake factory, restaurants