What’s being hinted at for Chris Mayer’s Focus?

Checking up on a stock Chris Mayer is "watching right now"

By Travis Johnson, Stock Gumshoe, September 27, 2016

I’ve had a bunch of readers asking me to look at the ads for Chris Mayer’s new service, so that’s the plan today.

We don’t usually see ads for newsletters that cite Stock Gumshoe, so that also helped catch my eye when I was browsing ads and deciding which teaser pitch to cover recently — the ad for the new Chris Mayer’s Focus service at Bonner and Partners actually quoted some Gumshoe readers who’ve commented on his work, and quoted a couple of the nice things I’ve mentioned about Chris in the past.

I’ve also been critical of some of Mayer’s ads in the past, of course, and he has certainly chosen his share of stinkers (as have we all). Most of the Agora-plex of newsletters use crazy over-the-top ads sometimes to get people hyped up and convince them to subscribe (Chris Mayer moved from Agora Financial to Bonner & Partners, but Bill Bonner founded Agora and they’re all interrelated)… but I do generally like Mayer’s form of value-focused analysis, probably mostly because it resonates pretty well with my way of thinking, and I have enjoyed his conference presentations when I’ve caught them in person.

And this new ad for Mayer’s service, which would run you a steep $3,000, does hint at a stock that Chris is “watching.” I don’t know if it’s an active recommendation, but I thought folks would be interested in discussing it… so can we get a name for you?

Here are the hints:

“For example, here’s one of the stocks Chris is watching right now.

“It owns two small regional restaurant chains (334 restaurants total).

“These are both strong restaurants with industry-leading sales per venue.

“For the last four years, through 2015, earnings per share have grown 36% annually.

“Long-term, Chris likes the story.

“He believes this restaurant could expand to at least 800 locations in the coming years… and hand investors a “10-bagger” gain.

“There’s nothing quite like it… But it reminds Chris a lot of Chipotle…”

So who is it? This is Fiesta Restaurant Group (FRGI), which owns the Pollo Tropical and Taco Cabana restaurant chains. There are actually now 336 company-owned restaurants, plus another 40 or so franchised locations, but otherwise the chart provided by the ad as a further “hint” matches FRGI’s past few months perfectly.

This is a company that’s doing some restructuring, and that has had a rough year or so — 2015 was the tail end of a big spurt of growth for them, earnings will likely be substantially lower this year than they were last year, but they are are expected to start growing again next year (say the analysts). So it’s not getting a wild growth valuation anymore either, back when they were finishing up those several years of rapid restaurant growth and earnings growth and posting more than $1.50 in earnings per share a year and a half ago, the stock was peaking in the high $60s with a PE ratio above 40.

Now, with earnings falling and expectations more muted, they’re still growing their restaurant base and likely to grow top line revenue and the PE ratio is about 19. The forward PE, based on expectations of earning $1.44 per share in 2017, is about 17.

Fiesta Restaurant Group was spun out of Carrol’s (TAST) back in 2012, primarily as a way to recognize the value of the growth in these regional chains instead of keeping them hidden inside a company that primarily operates Burger King franchises. The two chains have been around for several decades, but are very focused on specific geographies and it seems like they’ve been having a bit of a challenge, particularly marketing-wise, in building a presence in cities outside of South Florida (for Pollo Tropical) and Texas (Taco Cabana) — and it didn’t help that consumer spending growth in Texas, which is where much of their expansion has been focused in recent years for both brands, has apparently taken a bit of a hit from lower oil prices.

I haven’t done much analysis on this one yet, but there are some things to like — they are setting up Taco Cabana to be spun off as a separate company over the next couple years, and they’ve also been investing in re-imaging both brands with different looks and different restaurant designs that look pretty nice. I’ve never actually been in either restaurant, but Pollo Tropical is clearly where their focus is and they’re hoping to build a national brand and chain for that caribbean-style fast casual eatery.

Will it be the next Chipotle? Well, at their stores in the heart of South Florida, where their brand recognition is best, they do put up per-store numbers that are fairly similar to Chipotle (well, Chipotle during its heyday before the e coli mess) when it comes to revenue per store, so that’s good. And their margins are pretty good, though not as fantastic as Chipotle’s. The question really is whether they can continue to grow their store base and keep company revenues increasing, because the same store sales growth is not there right now. There’s a pretty good basic presentation about the company on their website here, though it’s a few months out of date.

The strategy of building up one media market at a time, to maximize the impact of TV advertising spending, makes sense to me, and the brand has been proven in at least one market — it doesn’t do quite as well outside of South Florida (on a per-store revenue basis) as it does in its core markets, but the stores don’t seem to be terrible elsewhere. I also like that, like Chipotle, they’re focusing on opening company-owned stores — it’s more expensive, and it means you can’t grow quite as quickly as you might otherwise, but it gives you much better control of the brand… and there’s potential for rapidly franchising in a few years, perhaps, once they’ve gotten more established in a few more cities. The company thinks their potential for Pollo Tropical is 1,600 locations (Chipotle and Panera are both around 2,000 at the moment, for comparison), so they’re only about 10% of the way there right now. The balance sheet is quite good, they do have some debt (as you’d expect for a company building out its own stores), but from what I’ve seen in their reports it’s very manageable at this point, and as expansion proceeds they should be able to at least double their debt load without causing any cash flow stress.

I have a hard time evaluating restaurants I haven’t seen, but the media coverage of Pollo Tropical that I’ve seen looks pretty good, and the image of the restaurants is pretty nicely differentiated… and if you can get a good restaurant chain that’s able to replicate its success across the country that can quite obviously turn a tiny company into a very large one, very quickly.

I’m inclined to watch this one, the lack of growth means there may not be any reason to jump in quickly at this valuation unless you’re otherwise seeing a lot that you like, since it’s not really in the “dirt cheap” category and they’ve had a couple disappointing quarters in a row and have had their analyst estimates cut many times this year, but I can see the potential for it to work out well if the brand strengthens outside of Florida… and Pollo Tropical is much more differentiated as a brand and a concept than is Taco Cabana, which looks similar to a lot of fast casual Mexican or Tex-Mex chains, so I like the plan to split the two chains in 2017 or 2018.

That’s all I’ve got for you so far, I’m going to keep an eye on FRGI but I’m not in a rush to jump in… if you’ve tried either of these restaurants, or have any thoughts about Fiesta Restaurant Group, feel free to share with a comment below.

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