I enjoy investing in restaurant companies. While the restaurant industry is incredibly brutal, Americans enjoy dining out. Every day hundreds of millions of Americans have to eat two or three times a day. Tens of millions choose to do so outside home.
Of course, here in the U.S. we have thousands of different restaurant options and not all of them are ensured success simply because of the necessity of eating. When I invest in restaurant stocks, I look for niche opportunities in unique concepts. A deep valuation alone can make a restaurant a very appetizing investment for me, but I typically try to get both.
I think I have almost found that in Bravo Brio Restaurant Group (BBRG). After a recent earnings report that disappointed analysts, shares have fallen back to $14 from $17, valuing the company at $264 million. The balance sheet is very strong with virtually no net debt ($5 million to be exact).
Bravo is a collection of more than 100 restaurants under the Bravo!, Cucina Italiana and BRIO Tuscan Grille names. The company has one Bon Vie, a full service American-French bistro concept. I would classify all of the company's restaurants as upscale casual with prices ranging from $6 to $12 for appetizers and $14 to $27 for entrees at dinner. The lunch menu is a bit less.
I like restaurants that are not competing in the pure play fast food segment. Fast food is in a constant pricing war and competition is most fierce in that segment. Bravo clearly caters to the working professional, couples looking for a nice evening out and families looking for a night out. Italian cuisine is a widely liked menu, one that can be made elegant but not over sophisticated as to turn away a lot of other customers.
What attracts me about Bravo is the cash flow. Over the past three years the company has generated nearly $40-$50 million in operating cash flow per year. Because the business is continuing to add stores, capital expenditures are eating up over half of that. So on a free cash flow basis, Bravo is trading for less than 15x FCF/EV. The company appears to be slowing down expansion, which could have a significant effect on the free cash flow that the company generates.
On an EV/EBITDA basis, Bravo is trading for 6.5x, compared with 9x for the Cheesecake Factory (CAKE), and 8x for Ruth's Hospitality Group (RUTH).
If the negative momentum surrounding the company's recent earnings report continues and the price dips further, Bravo is likely to make it in my portfolio. But even at today's price, the valuation is quite reasonable.
