CHUY'S HOLDINGS INC CHUY
March 11, 2013 - 8:43pm EST by
edward965
2013 2014
Price: 30.38 EPS $0.00 $0.00
Shares Out. (in M): 16 P/E 44.0x 35.0x
Market Cap (in $M): 514 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 514 TEV/EBIT 0.0x 0.0x

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  • Restaurant
  • Growth stock
 

Description

CHUY – Chuy’s TexMex – Long.   Stock worth more than double today’s value.  Fair warning – this is a growth stock with a high multiple, so may not be everyone’s cup of tea.

 

My (tongue-in-cheek) claim to having a variant opinion is that I eat Tex Mex – a lot.  In fact, I often eat it once a day.  So, I know my stuff.  I also live where Chuy’s started and have seen it progress over time as I first ate there 10+years ago when it was a local chain, before being bought by PE looking to grow it out.

Chuy’s is the most consistent and best Mexican chain, by far, especially given the price point (my wife and I spend ~$21 before tax for 2 entries + 2 teas, and have food left over to take home).  Sure, you can get better food at some one-off places, but making it consistently and repeatable is much rarer.  In fact, I’d compare Chuy’s to Chipotle in that respect.  Yes, there are other TexMex chains, but Chuy’s does it better, and no one is really big that I know of, nor bent on growing store count 20%/year for many years.   

Also, TexMex is a great food (when done right), so it makes it easier to find demand.  There are many countries and food groups that just don’t taste as good, and what is better than some deep-fried flautas with sour cream and guacamole – yum!  In all seriousness – Chuy’s is at least fishing where there are fish, in the sense that people generally like the food group, so if you prepare it well, you will have business.

One thing about Tex Mex is that it generally is poorly done south of a line through the middle of Texas (say around Austin, with the best IMO in San Antonio), and in Dallas you probably should go to Chuy’s since the local mom-n-pop TexMex places are ok but not great.  For instance, I know people in Minnesota that line up around the outside of Chipotle for a reasonable take at TexMex/Mexican since the alternative is TERRIBLE.  So, I think that if you had a well-done chain of TexMex around the country, it’d do great.

Ok, so if you take my word that the food is good (considering the low price point, this isn’t Rosa Mexicano in NYC with the pricey guacamole and more fancy service), is incredibly consistent (I’ve been to at least four locations, and they all do the food exactly the same, which points to good management), and all are usually packed with customers, then we get to move into valuation, growth potential, and competition.

Current Valuation:  At $514M market cap (assuming options are exercised bringing share count to just under 17 million), and about the same number for EV, it is 45x this year’s P/E and 36.6x next year’s.  They tend to beat by a little, so let’s call it mid 30s P/E for next year.  That’s compared to Chipotle at 26x next year. 

Growth Potential:  Given the multiple, you have to assume growth, lots of it.  They had 38 stores last Fall.  Let’s say they get to 500 stores at $5M current revenue each by growing for 21%/year for 11 years, so you get $2.5B revenue, and add some same-store sales to get to at least $3.0 Billion.  Management says they can do 20%+ growth every year, and I believe them as they seem like very good operators and the market opportunity is there.

Future Valuation:  Put a 10% EBIT margin on $3B of future sales ($300M EBIT), a 11x terminal multiple on that for $3.3B, and add in $300M of earnings net of capex, and you get $3.6B of market cap.  Growing stores at 21%/year average, it’ll take 11 years to hit that figure, or 19% return per year.   (They could do more than 500 locales, of course, hence my terminal multiple isn’t say 8x)  Put another way, if you only required a 9% discount rate per year, the NPV is about 175% higher than today’s price, or $80/share.

 

Barriers to Entry (aka Future Competition):  Not sure there is to be honest.  That said, it’s much harder to run a repeatable restaurant that people think, otherwise people would be doing it, and in Latin American I’ve seen lots of Chipotle knock offs that are just not that good.

Side note:  I hesitate to put a growth stock on VIC due to a likely low score, but I’m pretty sure this will work out over time.  If sales start to slip, I’ll just eat there more often.  Also, Chipotle was $50 when it came out, and it's done quite well since then, even if it's always looked expensive.

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Growth
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    Description

    CHUY – Chuy’s TexMex – Long.   Stock worth more than double today’s value.  Fair warning – this is a growth stock with a high multiple, so may not be everyone’s cup of tea.

     

    My (tongue-in-cheek) claim to having a variant opinion is that I eat Tex Mex – a lot.  In fact, I often eat it once a day.  So, I know my stuff.  I also live where Chuy’s started and have seen it progress over time as I first ate there 10+years ago when it was a local chain, before being bought by PE looking to grow it out.

    Chuy’s is the most consistent and best Mexican chain, by far, especially given the price point (my wife and I spend ~$21 before tax for 2 entries + 2 teas, and have food left over to take home).  Sure, you can get better food at some one-off places, but making it consistently and repeatable is much rarer.  In fact, I’d compare Chuy’s to Chipotle in that respect.  Yes, there are other TexMex chains, but Chuy’s does it better, and no one is really big that I know of, nor bent on growing store count 20%/year for many years.   

    Also, TexMex is a great food (when done right), so it makes it easier to find demand.  There are many countries and food groups that just don’t taste as good, and what is better than some deep-fried flautas with sour cream and guacamole – yum!  In all seriousness – Chuy’s is at least fishing where there are fish, in the sense that people generally like the food group, so if you prepare it well, you will have business.

    One thing about Tex Mex is that it generally is poorly done south of a line through the middle of Texas (say around Austin, with the best IMO in San Antonio), and in Dallas you probably should go to Chuy’s since the local mom-n-pop TexMex places are ok but not great.  For instance, I know people in Minnesota that line up around the outside of Chipotle for a reasonable take at TexMex/Mexican since the alternative is TERRIBLE.  So, I think that if you had a well-done chain of TexMex around the country, it’d do great.

    Ok, so if you take my word that the food is good (considering the low price point, this isn’t Rosa Mexicano in NYC with the pricey guacamole and more fancy service), is incredibly consistent (I’ve been to at least four locations, and they all do the food exactly the same, which points to good management), and all are usually packed with customers, then we get to move into valuation, growth potential, and competition.

    Current Valuation:  At $514M market cap (assuming options are exercised bringing share count to just under 17 million), and about the same number for EV, it is 45x this year’s P/E and 36.6x next year’s.  They tend to beat by a little, so let’s call it mid 30s P/E for next year.  That’s compared to Chipotle at 26x next year. 

    Growth Potential:  Given the multiple, you have to assume growth, lots of it.  They had 38 stores last Fall.  Let’s say they get to 500 stores at $5M current revenue each by growing for 21%/year for 11 years, so you get $2.5B revenue, and add some same-store sales to get to at least $3.0 Billion.  Management says they can do 20%+ growth every year, and I believe them as they seem like very good operators and the market opportunity is there.

    Future Valuation:  Put a 10% EBIT margin on $3B of future sales ($300M EBIT), a 11x terminal multiple on that for $3.3B, and add in $300M of earnings net of capex, and you get $3.6B of market cap.  Growing stores at 21%/year average, it’ll take 11 years to hit that figure, or 19% return per year.   (They could do more than 500 locales, of course, hence my terminal multiple isn’t say 8x)  Put another way, if you only required a 9% discount rate per year, the NPV is about 175% higher than today’s price, or $80/share.

     

    Barriers to Entry (aka Future Competition):  Not sure there is to be honest.  That said, it’s much harder to run a repeatable restaurant that people think, otherwise people would be doing it, and in Latin American I’ve seen lots of Chipotle knock offs that are just not that good.

    Side note:  I hesitate to put a growth stock on VIC due to a likely low score, but I’m pretty sure this will work out over time.  If sales start to slip, I’ll just eat there more often.  Also, Chipotle was $50 when it came out, and it's done quite well since then, even if it's always looked expensive.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Growth

    Messages


    SubjectUnit economics
    Entry03/12/2013 12:58 AM
    Membernathanj
    Can you talk about CHUY's unit economics?

    Subjectdarn it
    Entry03/12/2013 09:45 AM
    Memberheffer504
    i was just going to write this up as a screaming short!  but this writeup does a good job of exposing how flimsy the bull thesis is, so i guess i will move on...
     

    SubjectCHUY
    Entry06/20/2013 04:22 PM
    Memberangus309
    Edward, 
     
    Congrats. A very nice return, and having drawn a fair amount of derision for the idea, a welcome outcome. When I was in college in Austin back in the day, the original Chuy's on Barton Springs was THE spot.

    SubjectLunch plans
    Entry11/05/2014 10:03 AM
    Memberutah1009

    edward965: "If sales start to slip, I’ll just eat there more often."

     

    One of my all-time favorite VIC lines. I hope you're hungry. 


    SubjectRe: Lunch plans
    Entry11/05/2014 10:22 AM
    Memberzzz007

    Well...he should be able to afford it with his 140%+ annualized return on the idea.

    Timing is everything.

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