The Cheesecake Factory has been on fire lately. In the past six months alone, the company’s stock price has rocketed 49.8%, reaching $73.64 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in The Cheesecake Factory, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is The Cheesecake Factory Not Exciting?
Despite the momentum, we’re sitting this one out for now. Here are three reasons we avoid CAKE, plus one stock we’d rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
The Cheesecake Factory’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect The Cheesecake Factory’s revenue to rise by 4.7%, a slight deceleration versus This projection is underwhelming and suggests its menu offerings will see some demand headwinds.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
The Cheesecake Factory’s $2.14 billion of debt exceeds the $235.1 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $330 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. The Cheesecake Factory could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope The Cheesecake Factory can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
The Cheesecake Factory isn’t a terrible business, but it isn’t one of our picks. After the recent rally, the stock trades at 18.5× forward P/E (or $73.64 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.
Stocks We Would Buy Instead of The Cheesecake Factory
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