Rating Update: Stock Rating F-Lowest (9/30/19)-Fiesta Restaurant Group Inc (FRGI).

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BUSINESS

Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brands. The company’s Pollo Tropical restaurants offer citrus marinated, fire-grilled chicken, and other freshly prepared tropical inspired menu items; and Taco Cabana restaurants provide Mexican inspired food made fresh by hand. As of December 31, 2017, it had 146 company owned Pollo Tropical restaurants, which include 137 in Florida and 9 in Atlanta, Georgia; 166 company owned Taco Cabana restaurants; and franchised 31 Pollo Tropical restaurants in Puerto Rico, Panama, Guyana, Bahamas, Venezuela, and Florida, as well as 7 franchised Taco Cabana restaurants in New Mexico and Texas. The company was incorporated in 2011 and is headquartered in Dallas, Texas.
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INVESTMENT RATING

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With future capital returns forecasted to be above the cost of capital, FRGI is expected to continue to be a modest Value Builder.

Fiesta Restaurant has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Fiesta Restaurant has a neutral Appreciation Score of 52 but a very low Power Rating of 9, triggering the Lowest Value Trend Rating.

Fiesta Restaurant’s stock is selling below targeted value. The current stock price of $10.42 compares to targeted value 12 months forward of $13.
This neutral appreciation potential results in an appreciation score of 52 (48% of the universe has greater appreciation potential.)
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Fiesta Restaurant has a Power Rating of 9. (This very low Power Rating indicates that FRGI only has a higher likelihood of achieving attractive investment performance over the near to intermediate term than 9% of companies in the universe.)
Factors contributing to this very low Power Rating include: FRGI’s earnings estimates have fallen very significantly in recent months; and recent price action has been unfavorable. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

FRGI’s financial strength is low. Financial strength rating is 29.
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Relative to the S&P 500 Composite, Fiesta Restaurant Group Inc has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that FRGI is higher risk. High expected growth is a positive for FRGI. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high financial leverage, and low historical growth. FRGI’s valuation is moderate: low dividend yield, moderate P/E ratio, and low price/book ratio. FRGI has unusually low market capitalization.

CURRENT SIGNALS

Fiesta Restaurant’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

Fiesta Restaurant’s current technical position is mixed. The stock price is in a 0.7 month up move. The stock has appreciated 24.1% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Recent small negative changes in fundamentals have impacted Fiesta Restaurant Group Inc (NASDAQ: FRGI): significant quarterly earnings deceleration occurred.
The stock is currently rated F.
On 9/30/19, Fiesta Restaurant Group Inc (NASDAQ: FRGI) stock suffered a major decline of -23.1%, closing at $0.03. Trading volume in this decline was normal. Relative to the market the stock has been extremely weak over the last nine months and has declined -1.0% during the last week.

CASH FLOW

In 2018, Fiesta Restaurant generated a very significant increase in cash of +$1.66 million (+46%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$43.95 million. Non-operating sources contributed +$2.64 million (+6% of EBITDA). Cash taxes contributed +$2.77 million (+6% of EBITDA). Re-investment in the business amounted to -$47.71 million (-109% of EBITDA). On a net basis, debt investors pulled out -$0.75 million (-2% of EBITDA) while equity investors furnished +$0.76 million (+2% of EBITDA).
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Fiesta Restaurant’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Fiesta Restaurant Group Inc Peer Group. In most years, Fiesta Restaurant was in the top quartile. Currently, Fiesta Restaurant is upper quartile at +6% of EBITDA (+$2.64 million).

Fiesta Restaurant’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Fiesta Restaurant Group Inc Peer Group. In most years, Fiesta Restaurant was in the top quartile. Currently, Fiesta Restaurant is upper quartile at +6% of EBITDA (+$2.77 million).

Fiesta Restaurant’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Fiesta Restaurant Group Inc Peer Group. In most years, Fiesta Restaurant was in the top quartile. Currently, Fiesta Restaurant is lower quartile at -109% of EBITDA (-$47.71 million).

Fiesta Restaurant’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Fiesta Restaurant Group Inc Peer Group. In most years, Fiesta Restaurant was in the third quartile and lower quartile. Currently, Fiesta Restaurant is substantially above median at -2% of EBITDA (-$0.75 million).

Fiesta Restaurant’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Fiesta Restaurant Group Inc Peer Group. In most years, Fiesta Restaurant was in the top quartile. Currently, Fiesta Restaurant is substantially above median at +2% of EBITDA (+$0.76 million).

Fiesta Restaurant’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Fiesta Restaurant Group Inc Peer Group. In most years, Fiesta Restaurant was in the second quartile. Currently, Fiesta Restaurant is substantially above median at +4% of EBITDA (+$1.66 million).
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Fiesta Restaurant’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Fiesta Restaurant Group Inc Peer Group. In most years, Fiesta Restaurant was in the third quartile and lower quartile. Currently, Fiesta Restaurant is at the lower quartile at +1%.

PROFITABILITY

FRGI’s return on equity has eroded very significantly since 2012.
FRGI’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of FRGI’s assets declined over the full period 2009-2019: asset turnover has experienced a downtrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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FRGI’s return on equity is lower quartile (-22.2%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is lower quartile (-8.7%) reflecting asset turnover that is lower quartile (1.11X) and lower quartile pretax margin (-7.8%).
Tax “keep” rate (income tax management) is slightly above median (88.9%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is above median (2.87X).

GROWTH RATES

Overall, Fiesta Restaurant Group’s growth rate has slowed considerably in recent years.
Fiesta Restaurant Group’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 2.8% per year.

Total asset growth has been 4.3% per year.

Annual E.P.S. growth has been 1.6% per year.

Equity growth has been 30.4% per year. (More recently it has been -6.1%.)
No consensus growth rate forecast is available for Fiesta Restaurant Group.
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Relative to the Fiesta Restaurant Group Inc Peer Group, Fiesta Restaurant’s historical growth measures are erratic. Equity growth (30.4%) has been upper quartile. E.P.S. growth (1.6%) has been at the lower quartile. Revenue growth (2.8%) has been lower quartile. Total asset growth (4.3%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Fiesta Restaurant Group’s stock price performance has been variable and significantly below market. Between April, 2012 and September, 2019, Fiesta Restaurant Group’s stock price fell -13%; relative to the market, this was a -59% loss. Significant price moves during the period: 1) July, 2018 – September, 2019: -64%; 2) July, 2015 – June, 2016: -62%; and 3) October, 2012 – December, 2013: +295%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -61.0% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through September, 2019 of -61.0% is lower quartile relative to Fiesta Restaurant Group Inc Peer Group.

Current 5-year total return performance of -26.8% is lower quartile relative to the S&P 500 Composite.
Through September, 2019, with lower quartile current 5-year total return of -26.8% relative to S&P 500 Composite, Fiesta Restaurant’s total return performance is lower quartile relative to Fiesta Restaurant Group Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, FRGI’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is near the lower quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Fiesta Restaurant has a major value gap compared to the median valuation. For FRGI to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 0.93X to 0.28X. If FRGI’s ratio of enterprise value/revenue were to fall to 0.28X, its stock price would be lower by $-16 to $-5.
For FRGI to fall to lower quartile valuation relative to the Fiesta Restaurant Group Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.93X to 0.18X. If FRGI’s ratio of enterprise value/revenue were to fall to 0.18X, its stock price would decline by $-18 from the current level of $10.

VALUE TARGETS

With future capital returns forecasted to be above the cost of capital, FRGI is expected to continue to be a modest Value Builder.
Fiesta Restaurant Group’s current Price Target of $13 represents a +25% change from the current price of $10.42.
This neutral appreciation potential results in an appreciation score of 52 (48% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 52, the low Power Rating of 9 results in an Value Trend Rating of F.
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Fiesta Restaurant Group’s current Price Target is $13 (-22% from the 2018 Target of $17 but +25% from the 09/30/19 price of $10.42). This fall in the Target is the result of a +2% increase in the equity base and a -24% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a slight positive impact.
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PTR’s return on equity forecast is 7.1% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2011 and 2018. The current forecast is significantly below the 2012 peak of 118%.

PTR’s growth forecast is 5.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2011 and 2018. The current forecast is significantly below the 2015 peak of 16%.

PTR’s cost of equity forecast is 6.0% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, steady decline between 2012 and 2018. The current forecast is well below the 2012 peak of 13.3%.
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At Fiesta Restaurant Group’s current price of $10.42, investors are placing a negative value of $-3 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 8.4% versus a cost of equity of 6.2%.
PTR’s 2020 Price Target of $13 is based on these forecasts and reflects an estimated value of existing assets of $12 and a value of future investments of $1.

About John Lafferty 77056 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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