PFCB - P.F Chang's

[Gopinath]

According to Google,

 

P.F. Chang’s China Bistro, Inc. (P.F. Chang’s) operates in the United States food-service industry. The Company operates in two segments: P.F. Chang’s China Bistro (Bistro) and Pei Wei Asian Diner (Pei Wei). As of January 2, 2011, it owned and operated 201 full service Bistro restaurants that feature a blend Chinese-inspired cuisine and service in a bistro setting. Its restaurants offer flavored, culinary creations, prepared from fresh ingredients, including herbs and spices imported directly from China. The menu features traditional Chinese offerings and dishes. A full service bar offering a selection of wines, specialty drinks, Asian beers, sake, cappuccino and espresso complements the menu at the Bistro. As of January 2, 2011, it also owned and operated 168 quick casual Pei Wei restaurants that offer a menu of Asian cuisine. As of January 2, 2011, seven international Bistro restaurants were opened in Mexico and the Middle East.

 

Here's the 10 year history highlight from Morning star about the balance sheet & cash flow statements(all numbers are in USD Millions),

 

Total Equity           136.8  175.2  205.7  245.0  293.9  289.5  293.9  320.8  335.4  359.5  347.5

Tot Liab&Equity   173.0  218.5  273.1  383.5  466.7  514.1  622.6  667.4  652.2  634.7  594.6

 

Cash from Operat  43.8  55.4    74.5    109.5 108.5   123.4  137.9  139.8  160.4  122.2  125.0

Deprec/Amort        11.1  14.4    18.8    29.2 37.0   44.9  57.3    69.7  74.4 77.5   79.6

Capex                  (35.9) (43.5) (63.7) (84.2)  (94)  (114.3) (151.6) (87.2) (50.1) (37.2) (35.5)

 

Free Cash Flow   7.9     11.9  10.9    25.4 14.7   9.1     (13.6) 52.6   110.3  85.1  89.6

 

The business trades for around 700M with almost no debt with ample liquidity(~60M in cash). It looks like few downgrades & not enough sales growth in the last quarter slammed the stock price down. Their expectation/requirement for ROI for new restaurants is 30% which seems optimistic/stringent criteria for new openings. They have been giving dividends about $1/year now & reasonable number of new openings of restaurants.

 

Pros:

 

Excellent financial health, no debt & high cash position

CROIC - >13%

ROE - >30%

Price is less than 8 times FCF

Potential candidate for leveraged buyout as there is no debt & ample cash generation.

 

 

Cons:

 

New restaurant openings costs are few millions(2-4) per restaurant which is high in my view.

They spent some 230 M in last 6 years buying back stocks(from 2006) & only down 4 M stocks.. They have been issuing stocks excessively as they buyback??

600000 options are pending to be issued in Jan 2012. They say this exercise price will be adjusted/revised up/down (somebody can look into this)

 

Is there anything big that I'm missing & the market is focused on? Happy to hear your thoughts!

 

Gopi

 

[Ravi]

Right now it looks interesting for me. I like P.F.changs as a customer. This is little tempting. With $619MM Enterprise value. This looks a little tempting. Average around 110 After excluding maintenance cash flows. One down side risk is if double dip happens, even though this could stand well, it will drop with all restaurant stocks like 2009. and another risk includes also spending capex where incremental returns are not upto the mark.

 

Should we pit these stocks agains 7x forward earnings against HPQ.

 

It is tough decision. I never invested in restaurant stocks. Any insights will be helpful

[Gopinath]

Let me try to answer, I do invest in restaurants.

 

They have around 370 restaurants, you can buy them for ~660M as of today(1.75M/restaurant). They have around 70M in cash & generates over 120M in cash(if you deduct slowing down capex 40M, 80M in free cash flow). no debt.

 

If you think you can open/find cheaper restaurant opening/operating costs, this may not be a bargain.

 

Comparing to HP as a business & valuation, I like the above business valuation with no fear of technological change. but if the revenue falls(slow down/double dip/recession), price may go down even cheaper. So you pick your place in this industry & economy. 

[Ravi]

After doing further research, I came to know that all restaurants have noticed this and have increased asian options and most importantantly Cheesecake factory is coming up with a concept called Rocksugar pan asian restaurant which is a direct competition to this. Need to do little more digging into how is that faring vs. PFCB

[Ravi]

Briefly looked at the reviews and they are good for rock sugar. Probably this is real deal and going to be good competitor

[robface]

Thought on PF Changs? 

 

PF Chang’s Bistro (Nasdaq:PFCB) operates the 202-unit P.F. Chang’s China Bistro, an upscale Chinese restaurant concept, and the 173-unit Pei Wei Asian Diner, which offers freshly prepared Asian cuisine in a relaxed quick-casual setting with take-out flexibility.  Trading cheap, generates a lot of cash flows, competitive position, growing Pei Wei segment, potential international and licensing opportunities, great ROIC for each individual store...

 

PF Changs is trading at 4.8x LTM EBITDA and 6.6x LTM EBITDA - Total Capex

On a forward basis (2011E), its trading at 5.2x and 7.5x EBITDA and EBITDA - Capex

 

Returns on capital for PF Changs restaurants (per investor relations)

 

Bistro Resturant Built In . 2002 2003 2004 2005 2006 2007 2008 2008 2009 2010 63.0% 55.0% 28.2% 28.2% 23.2% 21.0% 19.1% 24.6% -14.0% 2009 58.4% 48.2% 25.3% 26.8% 21.6% 18.9% 19.0% 8.4% 2008 48.3% 40.9% 23.4% 23.3% 18.8% 18.0% -4.7% 2007 45.1% 39.3% 22.8% 22.7% 18.2% -12.2% 2006 46.0% 37.9% 21.4% 22.5% -17.9% 2005 40.3% 31.9% 18.7% -4.1% 2004 38.1% 29.3% -8.5% 2003 30.9% -1.6% 2002 -3.4%

 

Pei Wei Resturant Built In . 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 107.4% 72.5% 59.8% 35.7% 31.5% 19.0% 15.7% 13.7% -9.2% 2009 81.4% 51.8% 51.4% 31.9% 27.8% 15.8% 13.4% 11.5% 2008 55.7% 40.1% 41.5% 24.2% 19.9% 11.4% -3.1% 2007 50.8% 40.6% 36.1% 18.6% 14.7% -15.3% 2006 46.0% 33.5% 29.8% 13.8% -12.7% 2005 39.5% 31.5% 27.4% -16.1% 2004 32.9% 26.8% 13.0% 2003 28.7% 13.6%

 

Key Points:

 

• Durable Brand:  PFCB is a leader in the Asian niche with its dual-concept strategy.  Asian cuisine is facing favorable category headwinds.  The Bistro offers upscale casual dining with an average check of $20-21 while Pei Wei offers convenience and fast casual dining with an average check of $9-10.

 

• Strong Free Cash Flow Generation:  PFCB generates ~$100mm of free cash flow and is trading at 6.3x normalized EBTIDA less maintenance capex.  EBITDA levels and margins have remained consistent through the downturn.

 

• High Return on Invested Capital:  Both restaurant concepts generate attractive cash-on-cash returns close to 30% (see page 2). Pei Wei is positioned for further growth with 25-30 new stores by the end of 2012 while Bistro’s markets are nearing saturation.  Furthermore, PFCB is implementing a strategy to license the Bistro brand name internationally and is also introducing branded frozen food within the US.

 

• Declining Same Store Sales:  Restaurant sales depend on the economic environment and consumer spending.  If the economy continues to struggle, restaurant traffic and same store sales could stay flat or decline.  Consumer spending trends and new competition could affect the perceptions of the brand’s food quality, service, or ambiance.

 

• Health and Employment:  PFCB is subject to governmental oversight, including food safety and immigration laws.  Health concerns such as BSE pose a threat.  Additionally, 8 of 16 Pei Wei units were closed temporarily due to employing illegal workers.

 

• Input Costs:  Protein comprises ~50% of cost of sales.  PFCB generally locks in protein costs with annual or multi-year contracts.  Labor costs are running at ~33% of revenues.  A change in protein or labor costs could affect PFCB’s profitability.

 

FYE Dec. 31, 2007A 2008A 2009A 2010A LTM 2011E 2012E '07-'12E Avg. Bistro $849.7 $920.0 $925.3 $929.4 $924.1 $919.9 $911.9 $909.4 Pei Wei 243.0 278.2 302.7 310.1 311.1 312.1 320.9 294.5 Global brands -  -  0.1 3.3 5.0 6.2 12.6 3.7 Total Revenue $1,092.7 $1,198.1 $1,228.2 $1,242.8 $1,240.2 $1,238.2 $1,245.3 $1,207.6 % Growth 16.5% 9.6% 2.5% 1.2% NA -0.4% 0.6% NA " " Restaurant Profits $187.8 $206.8 $225.7 $226.1 $213.8 $207.2 $205.3 $209.8 % Margin 17.2% 17.3% 18.4% 18.2% 17.2% 16.7% 16.5% 17.4% Operating Profits $51.1 $52.5 $65.2 $65.0 $60.4 $50.7 $45.2 $54.9 % Margin 4.7% 4.4% 5.3% 5.2% NA 4.1% 3.6% 4.6% EBITDA $107.9 $121.2 $139.6 $142.5 $140.2 $130.9 $125.4 $107.7 % Margin 9.9% 10.1% 11.4% 11.5% 11.3% 10.6% 10.1% 10.6% Capex (1) $151.6 $87.2 $49.9 $37.1 $38.1 $40.0 $60.0 $114.3 % of Sales 13.9% 7.3% 4.1% 3.0% 3.1% 3.2% 4.8% 6.0% EBITDA - Capex ($43.6) $34.0 $89.8 $105.4 $102.1 $90.9 $65.4 $57.0 % Margin (4.0%) 2.8% 7.3% 8.5% 8.2% 7.3% 5.3% 4.5% P.F. Changs Restaurants 172 189.0 197.0 201 202 204 206 Profit Margin 9.4% 12.6% 13.4% 12.6% 11.2% 11.0% 10.6% Same-Store Sales Growth -1.6% -3.1% -6.8% -0.1% NA -2.2% -2.3% Traffic -4.7% -7.1% -6.2% 1.3% NA -3.7% -1.8% Pei Wei Restaurants 144 159 166 168 173 173 189 Profit Margin -0.4% 7.8% 9.2% 9.5% 7.2% 6.8% 5.7% Same-Store Sales Growth -1.6% -3.1% -6.8% -0.1% NA -2.2% -2.3% Traffic -1.3% -4.0% 0.7% 0.2% NA -4.8% -1.0%

 

[racemize]

It's free cash flow is certainly higher than earnings on a pretty consistent manner and the dividend is nice.  However, ValueLine has the ROE at ~11-13% and ROTC at ~10%, which are a bit lower than I usually like.  It seems like there are probably better opportunities out there, but it isn't bad either.