Feasting on BJ's Restaurants
As I recently shared, I have done a 180o on restaurants. When I wrote earlier this month, I mentioned BJ's Restaurants (BJRI) (12.16, $320mm) as one that I wanted to explore a bit more closely. Well, I paid the price for researching it, as it jumped 20% over the following week. I bought some yesterday near 12. The stock has declined from 24 over the past 11 months, so it is still on sale despite the sharp jump.
While the BJ's concept isn't exactly the greatest novelty since sliced bread, I do believe that it is a strong concept upon which the company executes extremely well. The company began as a Southern California pizza chain 30 years ago and transformed itself into more of a full-scale restaurant when it began brewing its own beer in 1996. The restaurant serves over 100 items and is considered to be value-oriented in the casual dining space. I happened to visit a BJ's in San Antonio earlier this week and found the contemporary atmosphere to be quite appealing, the food delicious, the service impeccable and the price quite reasonable. My kids gave it unsolicited rave reviews. But, I am a stock guy, not a restaurant analyst. I reviewed the recent conference call, the 10-K, the most recent proxy, the website and their investor presentation, and it is those data sources that give me the confidence to invest.
I believe that the company is well positioned for growth. With under 80 restaurants, about 1/2 of which are in California, the company has considerable room for expansion. They are targeting 15 openings per year and believe that they could reach 300 over time. The ticket price at the restaurant of about $12 per person is on the low-end for the casual dining industry. How do they deliver what seems to be higher quality for less money? I think that they would point to their mantra of "operational excellence". I would also add that pizza, beer and alcohol, with their very high margins, comprise 38% of sales roughly. The company has minimal debt, in contrast to an industry that tends to have balance sheets with debt representing about 40% of total capital.
I don't believe that there should be much controversy regarding the prospects for the company. The disputes, rather, are more focused on the valuation. I find the stock to be very reasonable considering its growth potential. As you can see in the chart below, the PE, at 22, is a large premium to the market, but it is low relative to both the history as well as the estimated growth of the company. I am also intrigued by the very low valuation relative to book value - just 1.5X.
Another interesting dynamic is the ownership. Insiders, including Jacmar (a distributor that also owns a pizza chain) account for 25% of the shares. The top 5 institutional holders account for about 30%. Meanwhile, shorts account for 16% of all shares outstanding, representing 11 days of trading volume. There has been a little insider buying too. Why the big short-interest? I suggest that part of it may be due to a misguided macro call against restaurants in general. I am confident, too, that many investors are concerned about the large negative free cash flow. The company tends to issue stock every couple of years (watch out, as they are due). Finally, those who look at the PE outside of the context of growth might expect the stock to do poorly solely for valuation reasons.
As I mentioned, I am long the stock and expect it to rise to at least 16 over the next year (based upon a 22 forward PE). I wouldn't be too surprised if it were to test the 10 area. I believe that the tough economy has actually masked the strength at the company and look forward to the easier comps in 2009.
Disclosure: Long BJRI
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