Description

Thesis

I think BJRI is best valued as a cyclical, and you buy cylicals at a low as long as the underlying story is a-ok and there are happy signs even if things are bleak.  This one trades at a 52 week low, sports a modest valuation compared to both trailing and projected cash flow, has a sold balance sheet for a restaurant, has sqft growth potential and and is currently focused on unit growth instead of buyback tricks the stock, and sometime in the next 2 to 3 years will likely make a run 100% higher as investor reclassify this as a growth company for a time at least. 

Small comments:

• I like BJRI cause it is the classic Value Line idea you can pick up in a quick scan.  With VL, the data never changes for the most part, and you can see margins bounce up and down and debt doing the same and most importantly you can see how futile the stock price has been for any long-term investors not buying at the lows.  Pair this with actually have a meal at the place and you get the concept, but then take a brief scan at the short investor presentation gives you what you want to know for the most part:  https://s2.q4cdn.com/698576155/files/doc_presentations/2022/2022-Shareholder-Meeting-vF.pdf 

• BJRI has essentially spent the last decade or so in a trading range with a high of $56.8 in 2011, another high of $76.5 in 2018, and finally some really big lows including $25 in 2013, $28 in 2017, and finally the big pandemic low of $6 which I distinctly remember lasting a day or so as it was falling a few dollars each hour.  Incredibly, after an equity infusion and stimulus checks and overall relief that BK wasn't in the cards this stock, in KSS-like fashion, vaulted to $63 in 2021.  

• That was then though, and just like KSS the stock has fallen out of favor with progress not happening as fast as hoped and subdued valuations across the entire restaurant area as inflation and labor spikes ever higher despite some decent news w/sales.

• Valuing this business is tricky if you use any of the more recent numbers cause those were all influenced by the pandemic.   Thus, to get a feel for the upside potential if you just eyeball the net margin numbers 4% looks logical to me and with 1200-1300 in sales in 2023-24 you'd get 52m.  Combined with 70-75m in DA and you have 120-125m compared to the current cap of 495m.  If you take the last 3 to 5 years, BJRI has generated 460m in CFFO, or almost 100% of the cap.  If you like PE ratios, it traded for 32x in 2018 and while it is doubtful that will happen soon 20x with $2 in earnings would get you to $40.  Both 20x and $2 are reasonable guesses.   Those of you who know anything about me though realize that I'm far too stupid to believe in any earnings model, instead preferring to think of stocks as potential things to reach here or there.  in this case, the reasons it hit there in the past - highs - are still very much there in the stock.  But it looks cheapish, period.  The stock is lower than it was in 2021, 2020, 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012, etc. but the business is the same thing; better times will come.   

• Of course, they've also done almost 300m in CapEx and flushed over 250m in buybacks over the past 5 years or so, but hopefully the buybacks - after the scare of 2020 which maybe proved to them that buying shares when bad events can threaten your business at any time - won't happen any time soon; at least until they get so overconfident again that they start the treadmill up based on analyst pressure at which time they will likely be at a cyclical high.  And if it matters, abt 40% of that Capex is maintenance, and if you ever been to a BJRI maybe you'd agree that depreciation may be overstated.

• Company has 214 units mostly in CA, TX, and FL and ample room to grow - saturation is pegged by the company at 425 which is likely a bit low, so there is plenty of room to expand.   They are aiming for 5% unit growth, a target they achieved in the past, and there is little reason to think this company can't reach much higher numbers if they don't do anything dumb with the BS.  However, the CapEx budget is going way up this year, which I think is a measure of the company's confidence in the future.   The BS, for a non-franchise restaurant, is really quite nice, though I am not including operating lease debt in any figures.  Still companies with sqft growth that eventually do get good news usually go up for some period of time, often sharply.  or as a wise investor said on this site,  "in a better tape, BJRI could go up a lot."

• Recent news has been gone from crummy to less bad, with comps negative during Omicron but getting back to mid-single digits by April.  With an average check of $19 and IMO high quality food/experience, I think most folks are going to eat out at restaurants and BJRI is a good choice with a varied menu.  And sure, there are commodity issues, staffing issues (hitting 10% of the chain so far), and if we get a recession then these stocks can get reflexly hit, but I think the stock has already gotten a beat-down and this too shall pass.  Sometime in the next few quarters, BJRI will outperform in the SSS and margins will pick up and people will remember this stock again.   They picked up a healthy takeout biz which hopefully sticks and eventually lunch comes back and the dining rooms staffed and happy times are here.

• That's it - this stock has been in a perpetual decline since early 2021 and yet the business is a-ok.  I don't know when it will turn, and it trades very hard so if you want to move it up you might get a day like Friday when it fell for 6% for no reason I could find.   This is an idea for a diversified portfolio, and it would never fit that punch-card theory (unless you had the gumption to buy at $6, along with all the other BK priced retailers and restaurants on that particular day), being somewhere between my 25th best idea and 39th best idea.  But that's irrelevant - I think this will work, and if it falls I will increase my wager and when it goes up I'll decrease it.   You make money trading it, period, and a big collection of these things usually produce very acceptable results.  Besides, doing research w/this idea is a pleasure.   It ain't for me (only drink the Root kind), but see you at Beer Club night.

Risks 

it can go down.  A lot.  See the stock chart.  Another pandemic, but at some point people just want to live.   They could spend too much on CapEx but they got an equity infusion in the past so not worried about this.   Lastly, no idea when it goes up.   

Catalyst

When inflation dips and recession fears don't overwhelm which will likely happen sometime in the next few days to the next 3 years