|Shares Out. (in M):||29||P/E||44.0x||41.0x|
|Market Cap (in $M):||1,380||P/FCF||NM||NM|
|Net Debt (in $M):||-53||EBIT||42||47|
|TEV (in $M):||1,327||TEV/EBIT||33.0x||28.0x|
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BJ’s is a solid, well-run company with decent future growth prospects ahead of it. However, the valuation has become disconnected with any rational or historic norms. BJRI currently trades at $48, which is roughly 17x EV/TTM EBITDA.
|Ending # Units||115||130||145|
|Target Ent Val/EBITDA||9.0|
|Share price at tgt mult||$33|
Our short thesis is based on the following truths:
|Company||Avg revs per unit||Current EV/EBITDA||Multiple History|
|PFCB||$3.6||6.5||Dropped from 17 > 9x from Dec ’04- Jun ‘06|
|RRGB||$1.6||7.6||Dropped from 15 > 8x from Jun ’05 – Dec ‘06|
|CAKE||$11.5||8.0||Dropped from 18 > 7x from Jun ’05 – Jun ‘08|
|BWLD||$1.0||11.6||Average dropped from 13x in 2007 to 8x in 2010|
|RT||$1.6||6.9||Dropped from 11 > 8x from Feb’04 – Feb ‘05|
|CBRL||$4.4||7.7||Hit 10x in 2006 before settling into 6-8 range since then|
|DRI||$4.0||8.7||Hit 10x in late 2007 before settling into 6-8 range since then|
|BJRI||$5.0||17.0||Has been at 17-20x for most of 2012|
Note: This point is best illustrated by graphing EV/EBITDA multiples for each company vs its revenue growth rate over a multi-year period. Graphs not included here due to formatting issues.2. The company is valued as if it had already achieved 5 years of mistake-free, industry-leading growth and margins. Thus, the catalyst for price revision will be the smallest mis-step.
Let’s do some basic math and project out the next 5 years of BJs. Let’s pretend that they continue to be able to identify enough locations to open up 15 units each and every year with the same robust $5 million run-rate. And that comps continue to be positive, with a solid 3% each and every year. And that none of the margin issues we outline below occur, allowing the company to maintain healthy EBITDA margins of 12.8%. And that no other material mis-step occurs, there is no economic downturn, etc. At that point, certainly the company will inarguably no longer deserve an astronomical multiple, but rather be solidly in the traditional zone of 7-8x. Here is how that would play out (see below). The stock price in this scenario would work out to $42. So it appears that the company is materially overpriced even if one gives them credit for five additional years of strong growth.
3. The pace of unit growth is limited due to the high expense, operational complexity and geographic limitations of the concept.
To their credit, management has consistently set rational targets for growth (currently up to 15 new units in 2012) which the market seems to ignore, leaving BJ’s priced for much loftier growth than is possible given issues specific to the business. These include the following:
4. Additional costs are likely to enter the system and hamper margins and cash flow. Significant items include workers comp, advertising, and maintenance capex.
To-date the company has yet to experience several cost spikes that have heretofore been inevitable for restaurants hitting a certain scale:
“We have a major advancement coming on our pizza that will be set for rollout shortly where we’ve worked on the presentation and how we stage the toppings that has enabled us in tests to sell more pizza”
“All of our new restaurants now feature a large, impressive entry statement, high ceilings with detailed contemporary decors. And when we combine our contemporary casual-plus interiors with our broad menus, signature pizza and beer, we have a unique, differentiated positioning that should give BJ’s many years of solid new restaurant growth to come”
“The seasonal beers have just been incredible. And every year as we develop this portfolio of seasonal beers, and I think we’re up to about half a dozen now, every year that we offer them, our guests anticipate them…. So it’s a real competitive capability that we have in the BJ’s concept and I think it kind of falls under our positioning as the premier retailer of craft beer on tap in casual dining”
This for a restaurant that serves pizza, burgers, salads beer, and has a large television. Pleasant, to be-sure, but far from ground-breaking. And far from sustainable. When the novelty of its ‘newness’ wears off, one will be looking at a slightly larger version of Applebee’s. There simply is not one single example of a large-scale casual restaurant brand that has defied this natural trajectory.
In sum: We like the business. The food is pretty good. The stock is significantly overvalued. We look for any speed bumps along the way to trigger a recalibration to a more sensible and sustainable valuation.
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