Finding Value In The Fast Casual Segment
The fast casual dining industry has been one of the most talked about segments of the market over the past year. The following chart of sales and earnings growth helps to explain this phenomena. F2024-F2015 growth is measured as the estimated growth between fiscal year 2015 and fiscal year 2014.
This article compares multiples for five of the most popular fast casual restaurants: Chipotle, Panera, Noodles, Potbelly and El Pollo Loco. Because the segment is growing very quickly, multiples are based on Wall Streetâs estimates one year in the future.
To get a quick sense of relative value, each company was ranked from one to five on forward PE, EV/Sales and EV/EBIT. The three ranks were then averaged for a composite score. Some may argue that multiples without growth in the denominator arenât useful, however I do not believe this is the case here because the growth looks to have normalized by 2015 (with the exception of Panera).
Composite multiple rank: 4.7/5.0
As noted above, Panera has significantly less projected growth than the comparable group, so it makes sense for Panera to have lower multiples. A primary reason for lower growth is that Panera is closer to its target number of restaurants than other fast casual restaurants, so growth will be more dependent on increasing same store sales.
Forward PE and EV/EBIT multiples are the lowest at 26.33 and 16.7. EV/Sales is the fourth lowest at 0.87.
Composite multiple rank: 3.3/5.0
El Pollo Loco started its life as a publicly traded company at the end of July. Shares initially skyrocketed as pundits compared the company to Chipotle (which is ~27 times larger by market cap), but are now trading just a few percent higher than they opened. Note that TTM figures were not included in the chart above because old data is unaudited and it may be non comparable due to accounting nuances.
Shares of El Pollo Loco are trading at a forward PE of 38.5 and forward EV/EBIT of 22.3, fourth highest of the peer group. EV/Sales is currently second highest at 3.08.
Composite multiple rank: 3.0/5.0
According to the chart above, Potbellyâs earnings fell 99.3 percent in the most recent twelve months. While this is technically correct, much of the decrease is due to a one time $16 million tax credit. Excluding the tax credit, earnings are down 84.5 percent. The drop in earnings can be largely attributed to a 14.2 percent increase in SG&A expenses.
Potbelly has the lowest EV/Sales multiple at 0.87, but the second highest PE and EV/EBIT multiples of 60.6 and 29.6.
Composite multiple rank: 2.3/5.0
Chipotle is arguably the most talked about fast casual restaurant on Wall Street. This is probably a function of the companyâs double digit growth and $20.9 billion market cap. A combination of retail investor attention and liquidity likely play a role in boosting the stockâs price, compared to its peers.
The company has the highest EV/Sales multiple at 4.9 and median PE and EV/EBIT multiples of 47.9 and 28.1.
Composite multiple rank: 1.7/5.0
With the goal of opening 2,500 noodle dish restaurants across the country, the company currently has just over 400 restaurants. 2014-2015 growth is projected to be the highest among the peer group at 17.3 percent sales growth and 26.7 percent earnings growth, however it also has the PE at 65 and EV/EBIT of 38. EV/Sales ranks in the middle at 1.95.
The following table summarizes these finding.
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