Over the past six months, The Cheesecake Factory’s stock price fell to $50.87. Shareholders have lost 15.2% of their capital, which is disappointing considering the S&P 500 has climbed by 13%. This might have investors contemplating their next move.
Is now the time to buy The Cheesecake Factory, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.
Why Is The Cheesecake Factory Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why CAKE doesn't excite us and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.
The Cheesecake Factory’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1% per year.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect The Cheesecake Factory’s revenue to rise by 3.9%, a deceleration versus This projection doesn't excite us and implies its menu offerings will see some demand headwinds.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
The Cheesecake Factory’s $2.12 billion of debt exceeds the $190 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $325.3 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. The Cheesecake Factory could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope The Cheesecake Factory can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
The Cheesecake Factory isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 12.8× forward P/E (or $50.87 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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