The Cheesecake Factory’s 15.3% return over the past six months has outpaced the S&P 500 by 9.5%, and its stock price has climbed to $62.73 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in The Cheesecake Factory, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is The Cheesecake Factory Not Exciting?
Despite the momentum, we're swiping left on The Cheesecake Factory for now. Here are three reasons we avoid CAKE and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
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 barely increased over the last two years as its same-store sales were flat.
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 4.1%. This projection is underwhelming and indicates 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 $2.13 billion of debt exceeds the $215.7 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $324.4 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’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 14.9× forward P/E (or $62.73 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.
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