BUSINESS
The Cheesecake Factory Incorporated operates restaurants. It operates two bakeries that produces cheesecakes and other baked products for its restaurants, international licensees, third-party bakery customers, external foodservice operators, retailers, and distributors. As of October 27, 2022, the company owned and operated 312 restaurants in the United States and Canada under brands, including The Cheesecake Factory, North Italia, and a collection of Fox Restaurant Concepts, as well as 29 The Cheesecake Factory restaurants under licensing agreements internationally. The Cheesecake Factory Incorporated was founded in 1972 and is headquartered in Calabasas, California.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, CAKE is expected to continue to be a major Value Builder.
Cheesecake Factory has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Cheesecake Factory has a neutral Power Rating of 44 and a neutral Appreciation Score of 42, with the Negative Value Trend Rating the result.
Cheesecake Factory’s stock is selling below targeted value. The current stock price of $34.23 compares to targeted value 12 months forward of $42.
This neutral appreciation potential results in an appreciation score of 42 (58% of the universe has greater appreciation potential.)
Cheesecake Factory has a Power Rating of 44. (This neutral Power Rating indicates that CAKE’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: the trend in CAKE’s earnings estimates has been unfavorable in recent months; and the Eating Places comparison group is in a slightly weakened position currently. An offsetting factor is recent price action has been neutral.
INVESTMENT PROFILE
CAKE’s financial strength is low. Financial strength rating is 12.
Relative to the S&P 500 Composite, Cheesecake Factory Inc. has both Growth and Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that CAKE is extremely high risk. Relative weaknesses include: low historical profitability, low financial strength, high stock price volatility, high financial leverage, low historical growth, and high earnings variability. CAKE’s valuation is low: high dividend yield, low P/E ratio, and moderate price/book ratio. CAKE has unusually low market capitalization.
CURRENT SIGNALS
Cheesecake Factory’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; and rising tax keep rate.
Cheesecake Factory’s current technical position is very strong. The stock price is in a 3.0 month up move. The stock has appreciated 23.4% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
In light of this new information we are reviewing our current Overall Rating of D. This review will be completed in the next several days.
The Cheesecake Factory Inc. (NASDAQ: CAKE) has reported E.P.S. of $0.27 for its fourth fiscal quarter (ending December 31) versus $-0.07 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $2.10 compared to $0.87 a year ago.
The Cheesecake Factory Inc. (NASDAQ: CAKE) stock closed at $34.23 on 2/21/24 after a modest decline of -1.5%. Moreover, this decline was accompanied by unusually high trading volume at 177% of normal. The stock has declined -2.7% during the last week and has performed in line with the market over the last nine months.
CASH FLOW
In 2022, Cheesecake Factory experienced a very significant reduction in cash of -$74.8 million (-39%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$143.2 million. Non-operating uses consumed -$19.5 million (-14% of EBITDA). Cash taxes contributed +$10.2 million (+7% of EBITDA). Re-investment in the business amounted to -$152.0 million (-106% of EBITDA). On a net basis, debt investors provided +$24.5 million (+17% of EBITDA) while equity investors received -$81.3 million (-57% of EBITDA).
Cheesecake Factory’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Cheesecake Factory Peer Group. In most years, Cheesecake Factory was in the third quartile and top quartile. Currently, Cheesecake Factory is substantially below median at -14% of EBITDA (-$19.5 million).
Cheesecake Factory’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Cheesecake Factory Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Cheesecake Factory was in the top quartile and second quartile. Currently, Cheesecake Factory is upper quartile at +7% of EBITDA (+$10.2 million).
Cheesecake Factory’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cheesecake Factory Peer Group. In most years, Cheesecake Factory was in the second quartile and third quartile. Currently, Cheesecake Factory is substantially below median at -106% of EBITDA (-$152.0 million).
Cheesecake Factory’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Cheesecake Factory Peer Group. In most years, Cheesecake Factory was in the second quartile and top quartile. Currently, Cheesecake Factory is slightly above median at +17% of EBITDA (+$24.5 million).
Cheesecake Factory’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cheesecake Factory Peer Group. (Since 2020 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Cheesecake Factory was in the lower quartile. Currently, Cheesecake Factory is lower quartile at -57% of EBITDA (-$81.3 million).
Cheesecake Factory’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Cheesecake Factory Peer Group. In most years, Cheesecake Factory was in the third quartile and second quartile. Currently, Cheesecake Factory is substantially below median at -52% of EBITDA (-$74.8 million).
Cheesecake Factory’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cheesecake Factory Peer Group as well. In most years, Cheesecake Factory was in the second quartile and third quartile. Currently, Cheesecake Factory is slightly above median at +3%.
PROFITABILITY
Cheesecake Factory’s return on equity has eroded very significantly since 2013. The current level of 26.5% is 1.34X the low for the period and is at the high.
Cheesecake Factory’s very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a major performance consideration.
The productivity of Cheesecake Factory’s assets declined over the full period 2013-2023: asset turnover has suffered a very strong overall downtrend although it experienced a very sharp recovery after the 2020 low.
Cheesecake Factory’s pretax margin experienced a volatile overall downtrend over the period 2013-2023.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
Cheesecake Factory’s return on equity is upper quartile (26.5%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is lower quartile (2.8%) reflecting asset turnover that is below median (1.24X) and lower quartile pretax margin (2.2%).
Tax “keep” rate (income tax management) is upper quartile (110.7%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is upper quartile (8.63X).
GROWTH RATES
Overall, Cheesecake Factory’s growth rate has slowed very considerably in recent years.
Cheesecake Factory’s historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 5.3% per year. (More recently it has been 15.1%.)
Total asset growth has been 12.0% per year. (More recently it has been -4.5%.)
Annual E.P.S. growth has been -5.4% per year.
Equity growth has been -7.8% per year. (More recently it has been -15.2%.)
Cheesecake Factory’s consensus growth rate forecast (average of Wall Street analysts) is 21.8% — substantially above the average of the historical growth measures.
Relative to the Cheesecake Factory Peer Group, Cheesecake Factory’s historical growth measures are erratic. Revenue growth (5.3%) has been slightly above median. Total asset growth (12.0%) has been above median. E.P.S. growth (-5.4%) has been lower quartile. Equity growth (-7.8%) has been lower quartile.
Consensus growth forecast (21.8%) is at the upper quartile.
PRICE HISTORY
Over the full time period, Cheesecake Factory’s stock price performance has been variable and significantly below market. Between April, 2013 and February, 2024, Cheesecake Factory’s stock price fell -14%; relative to the market, this was a -72% loss. Significant price moves during the period: 1) April, 2021 – June, 2022: -58%; 2) March, 2020 – April, 2021: +266%; and 3) July, 2018 – March, 2020: -70%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -9.5% is substantially below median relative to the S&P 500 Composite.
In addition to being substantially below median relative to S&P 500 Composite, current annual total return performance through January, 2024 of -9.5% is lower quartile relative to Cheesecake Factory Inc. (The) Peer Group.
Current 5-year total return performance of -3.1% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -3.1% relative to S&P 500 Composite, Cheesecake Factory’s total return performance is lower quartile relative to Cheesecake Factory Inc. (The) Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, CAKE’s overall valuation is normal. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Price/equity ratio is above median. Price/earnings ratio is below median. Ratio of enterprise value/assets is below median. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
Relative to Cheesecake Factory Peer Group, CAKE’s overall valuation is high. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Price/equity ratio is upper quartile. Price/earnings ratio is above median. Ratio of enterprise value/revenue is at median. The lowest factor, the ratio of enterprise value/assets, is at the lower quartile.
Cheesecake Factory has no value gap compared to the median. For CAKE to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.04X to 1.04X. If CAKE’s ratio of enterprise value/revenue were to fall to 1.04X, its stock price would be lower by $-0 to $34.
For CAKE to achieve upper quartile valuation relative to the Cheesecake Factory Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.04X to 1.14X. If CAKE’s ratio of enterprise value/revenue were to rise to 1.14X, its stock price would increase by $7 from the current level of $34.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, CAKE is expected to continue to be a major Value Builder.
Cheesecake Factory’s current Price Target of $41 represents a +19% change from the current price of $34.23.
This neutral appreciation potential results in an appreciation score of 42 (58% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 42, the neutral Power Rating of 44 contributes to an Value Trend Rating of D.
Cheesecake Factory’s current Price Target is $41 (+215% from the 2022 Target of $13 and +19% from the 02/21/24 price of $34.23). This dramatic rise in the Target is the result of a +13% increase in the equity base and a +178% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a very large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a very slight negative impact.
PTR’s return on equity forecast is 52.6% — substantially above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is significantly above the 2014 low of 18%.
PTR’s growth forecast is 4.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2014 and 2022. The current forecast is below the 2014 peak of 7%.
PTR’s cost of equity forecast is 14.0% — in line with recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2014 and 2022. The current forecast is above the 2014 low of 9.2%.
At Cheesecake Factory’s current price of $34.23, investors are placing a positive value of $9 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 27.2% versus a cost of equity of 13.7%.
PTR’s 2024 Price Target of $41 is based on these forecasts and reflects an estimated value of existing assets of $25 and a value of future investments of $15.
Be the first to comment