Gas is $4.29. Consumer sentiment is the second-lowest reading since 1978. And a sit-down restaurant chain just reported mid-single-digit traffic growth on top of three years of double-digit comps.
With a toddler and a 1-month old at home, I admit we haven’t gone out as much as before. But whenever we do, I feel the restaurant inflation plus the expected 25% tip! And yet each time we go out, the restaurants are full. If we don’t reserve ahead of time, we end up waiting for hours!
The numbers say the same thing. Regular unleaded is $4.29 a gallon, 40% above a year earlier, and 56% of Americans told the University of Michigan that prices were hurting their finances. Five days later, a casual-dining operator reported 6% more guests through its doors than a year earlier. Same-store sales grew double digits for the third year in a row. Restaurant margins went up.
You’d expect Mr. Market to pay up for that. He hasn’t. The shares sit 20% below their August high, the one factor its quant score flags as weak is Valuation, and most of what’s written about the name argues one of two things: the comps are about to lap themselves into the ground, or the multiple is too rich for a sit-down restaurant.
I think both arguments look at the wrong part of the business. The comps are the result of the last three years. The next three years run on something Mr. Market isn’t pricing at all: a store base running 1,000 guests a week below its own historical peak, a new-unit program that earns 18-20% cash on cash, and a buyback that retires 3-5% of the shares every year. I rebuilt the model around that plan and the bear case clears the hurdle I ask for.
I picked this name in 2024. It is up 330% since then and I still see upside in the stock. Below is the full deep dive, the rebuilt model, 10,000 Monte Carlo runs, and the rating change.