Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Stock Analysis
Kai Liu
1/15/2018
The Cheesecake Factory Stock Analysis
Valuation Date: Jan 2nd. 2018 Recommendation: BUY
Valuation Date Jan 2nd 2018
Stock Exchange: Nasdaq Industry: Restaurant
Methodology WEIGHT PRICE
Current Price: $49.31 Target Price: $62.04
Absolute 50% 70.85
Relative 50% 53.22 Summary: The Cheesecake Factory is an American restaurants company
Target price 62.04 headquartered in Calabasas Hills, California.
Upside return 25.81%
Highlights:
Stock Profile Jan 2nd. 2018 Financial Performance:
Closing Price 49.31
Proper debt structure and high solvency
Outstanding Shares 44.2 M
BETA 0.48 Outstanding financial performance in the industry
Assets 1,308.1 A three-stage FCFF model was used to evaluate the company
EBITDA 231.4 We estimated the extraordinary growth period to be 10 years based on
Net Income 140.60
company’s long-term growth plan
D/E 1.6
Coverage 30.2 We calculated a value-per-share of $70.85
Solvency Ratio 1.5 Relative Valuation
60.00mm
CAKE STOCK PRICE
62.00
50.00mm 52.00
40.00mm 42.00
30.00mm 32.00
20.00mm 22.00
10.00mm 12.00
0 2.00
COMPANY OVERVIEW
company history, historical stock performance, debt structure, financial performance, and
Company History
Hills, California. It runs more than 210 casual-dining restaurants all over the country, including
199 The Cheesecake Factory restaurants, 14 Grand Lux Café, and two RockSugar Pan Asian
Kitchen restaurants. Their restaurants offer a diverse menu of items produced from scratch using
Stock Price
The closing price on Cheesecake Factory’s first day of trading in September 1992 was
$3.29. Throughout the years it grew to a closing price of $49.31 on December 30th, 2017: the
time of our analysis. The price increased by 1398% over the past 26 years. In the past six years it
has grown by 6.6% and in the past year it has fallen by 1.7%. Overall, the stock has seen stable
price growth.
Fig 2: Cheesecake Factory stock price September 1992 December 2017
Debt Structure
According to Bloomberg, The Cheesecake Factory has a D/E ratio of 19.3%, and the debt
only takes 8.9% of its total assets. The company has extremely low traditional debt compared to
the average in the restaurant industry (50.12%). Also, some critical ratios related to the
company’s long-term operations shows us the company has a very healthy debt structure, and it
is almost impossible that the company would default its obligations. The company has an
extremely high-interest coverage ratio of 30.4 and a relatively high solvency ratio of 1.5. Under
such a condition, we consider The Cheesecake Factory is financially healthy and will continue
Financial Ratios
In this part, we focus on the company’s profitability and financial health as the key
financial indicators shown in Figure 3. The company has relatively high profitability and healthy
financial performance. Here we want to highlight the asset turnover of 1.8 and the accounts
receivable turnover of 160.1. These two ratios indicate that the company keeps efficiently using
Accounts Receivable
160.1 15.3
Turnover
(Bloomberg, end December 2017)
Strategy Analysis
The Strategic Position & Action Evaluation matrix or short a SPACE matrix is a method
to figure out the optimal strategy position of the company by evaluating the key ratios of the
company and the overall environment of the industry. We assess each part in the method and rate
them. For financial strength (FS) and industry strength (IS), a score of 6 represents the best
condition. For competitive advantages (CA) and environmental stability (ES) a score of -1
represents the best situation. Notice that we need to subtract financial strength score from
competitive advantages score, so does the industrial strength. After that, we add the two final
scores on the number axis to draw a strategy line. This line reveals the optimal strategy position
of the company. Figure 3 shows the standards we used to analyze, and Figure 4 shows the result
of the SPACE Matrix. The optimal strategy position for The Cheesecake Factory is the
aggressive strategy, which means the company will probably get more advantages by expanding
its business.
Internal Position External Position
INDUSTRY OVERVIEW
The Cheesecake Factory is a firm in the restaurant industry. In this section, we chose
some key financial indicators (see Figure 6) of the industry and applied a Five Forces Analysis in
order to understand the future of the industry and how the company fits within the vision. The
increasing ROE and profit margin of the industry indicates that its profitability is increasing in
the past five years and will probably keep increasing in the future. Also, the long-term solvency
of the whole industry is high, because the D/E ratio and the interest coverage ratio are stable and
fall into a proper range. Both revenue growth rate and net income growth rate of the industry was
also increasing in the past five years. Analysts predict that the industry will continue growing at
Figure 7 shows us the Five Forces Model of the restaurant industry. This industry is a
mature industry that contains thousands of companies. Customers can choose from numerous
different brands and frequently switch their choices at a low cost. Also, the profitability of a
restaurant company highly depends on the cost of goods. A small change of the price of
ingredients and equipment can greatly affect profitability. Thus, the bargaining power of both
customers and suppliers are high. Moreover, due to the severe homogenous competition in the
industry, customers can always find substitutes for their favorite dishes. We believe the threat of
substitutes is relatively high. As we know the restaurant industry relies highly on scale merit.
The scale effect makes the threat of new entry lower than other industries. After
comprehensively considering these four forces and the maturity of the industry, we believe that
the rivalry among existing competitors is high.
Both the financial performance of the industry and the Five Forces Analysis show us that
though the industry is mature, it will keep growing in the future. This result is consistent with our
analysis of Cheesecake Factory’s optimal strategy position, which is the company will gain more
advantages by expanding its business. Thus, we believe The Cheesecake Factory is a well-
RELATIVE VALUATION
Peer Universe
We determined comparable companies for The Cheesecake Factory based on the Restaurant
segment under Bloomberg Intelligence, and we narrowed the list down to include only Casual
Dining Restaurants. We excluded fast food restaurants and firms whose primary incomes do not
come from casual dining. We did not strictly screen out companies by market capitalization,
growth potential, or cash flow size to avoid over-restricting our sample. We ended up with 10
firms: Bj's Restaurants Inc (BJRI), Texas Roadhouse Inc (TXRH), Darden Restaurants Inc (DRI),
Cracker Barrel Old Country (CBRL), Brinker International Inc (EAT), Bloomin' Brands Inc
(BLMN), Denny's Corp (DENN), Fiesta Restaurant Group (FRGI), Chuy's Holdings Inc
Fundamental Metrics
We acquired all fundamentals for comparable firms in the fiscal year 2017 from
Bloomberg. The fundamentals are enterprise value (EV), revenue, EBITDA, adjusted EBITDA,
EBIT, adjusted EBIT, stock price (12/31/2017 closing price), and Earnings Per Share (EPS). EPS
was calculated as Net Income divided by the Basic Weighted Average Shares Outstanding,
which counted potential convertible securities. EV included Minority Interest. For both adjusted
EBIT and adjusted EBITDA, we used Bloomberg-adjusted numbers. EBIT and EBITDA were
adjusting for abnormal items, which includes gains or losses from non-recurring items, realized
investment, restructuring, merger and acquisition, unusual charges, special and reserve charges,
Key Multiples
EV/adjusted EBIT and EV/Sales. The results of this analysis can be found in Figure 8. To avoid
bias, we used peer median as the industry average instead of mathematical mean. Overall,
The P/E ratio of the ten comparable firms has a standard deviation of 11.90. Both FRGI
and DIN have negative P/E ratios, resulting from negative EPS in 2017 of -1.35 and -18.28
respectively. The industry average of P/E ratio is 17.33x, higher than Cheesecake Factory’s P/E
of 14.4x. By using the industry average, we calculated the firm’s share price to be $58.07. Then
we controlled the difference of growth rate, payout ratio, and firms’ risk, regressing P/E ratio
against the five-year historical compound annual growth rate, dividend payout ratio, and firm
ratio)+49.38*(ß), with R2=0.32 and variable t-stats of 1.21, 1.53, and 0.84, respectively. From
regression, we got a projected P/E as 14.82x and estimated share price as $49.62.
Next, we will evaluate revenue multiples. Cheesecake Factory stock was trading at 1.0x
their EV/S while the peer median is 1.26x. Even when the outlier with the highest revenue
multiples (3.6x) is removed, the peer average of 1.13x is still higher than the Cheesecake
Factory’s. By using the average, we got a share price of $60.72. To control the differences in
operating margin, we regressed the multiples of 10 peer firms against their after-tax operating
margins and got projected EV/S = -0.038+0.21*(after-tax operating margin) with R2=0.89 and a
variable t-stat of 7.90. The expected EV/S is 1.02, close to the trading revenue multiple of
Cheesecake Factory. By multiplying projected EV/S with sales, we estimated the share price of
$49.26.
For operating multiples, we used adjusted operating income for smoothing out the effect
of outliers whose earnings were affected by non-recurring items in 2017. Before adjusting for
extraordinary items, EV/EBITDA has a standard deviation of 30.18 and EV/EBIT had a standard
deviation of 11.26. Adding back extraordinary items, standard deviations were smoothed down
to 1.84 and 3.30 for EBITDA and EBIT multiples. We got a peer median EV/adj. EBIT of
15.23x and EV/adj. EBITDA of 9.82, projecting the company values of $52.94 and $53.57 by
ABSOLUTE VALUATION
To determine a value for Cheesecake Factory using absolute valuation, we will employ
the Free Cash Flow to Firm (FCFF) model. With a Debt-to-Equity ratio of just .03, they would
initially appear to be appropriate for an equity valuation model rather than one that evaluates the
whole firm such as FCFF. But, Cheesecake Factory currently has a significant future operating
lease obligation. When the present value of this obligation is treated as debt, the debt-to-equity
ratio becomes .46, and we see that the FCFF model is appropriate. Lease information is available
in Figure 10.
Before calculating the value using FCFF, we must first determine the weighted average
cost of capital of the firm (WACC). Beta was calculated in two ways. The first calculation is a
historical beta that comes from a regression of Cheesecake Factory monthly returns over the
previous five years against the S&P 400 index fund monthly returns. This calculation resulted in
a beta of 0.551. The second method of beta calculation came from the bottom-up method. The
comparable firms used were Cheesecake Factory’s direct competitors traded in the S&P 400:
Texas Roadhouse, Cracker Barrel, and Brinker International Restaurant company. Only S&P 400
firms were used for this calculation to eliminate discrepancy in returns that came from index bias
or differences in firm size. Levered betas for each competitor firm were derived by regressing
monthly stock returns against S&P 400 returns over the previous five years. The bottom-up
method calculated a beta of 0.484. As our base estimate, we will use the regression beta of 0.551
going forward.
To get the cost of equity for the firm, we used the Capital Asset Pricing Model. The risk-
free rate used was 3.10%: the U.S. 10-year Treasury rate at the time of calculation. The market
risk premium used is 5%. This is the estimate commonly used by valuation firm Duff and Phelps.
Getting the cost of debt of Cheesecake Factory is difficult because the firm takes on very
little traditional debt. They have no outstanding bonds and borrow using a revolving line of
credit at a rate of around 1.83%, calculated as .5% above the current Federal Funds Rate.
Information regarding this line of credit came from the 2017 10K. Because the rate they receive
does not take the leases into account, we feel that it is not appropriate as a cost of debt. Instead,
we will use the interest rate spread derived from their interest-coverage ratio, which gave us a
Using these inputs, a weight of debt and weight of equity calculated using the lease-
adjusted debt, and an effective tax rate of 13.5% (estimated by the firm itself in their 10K) we
For our valuation model, we will use a 3-stage FCFF model. The first stage is constant,
extraordinary growth. We will use a base revenue growth assumption of 4.33%, which comes
from Cheesecake Factory’s 10K projections, for this stage. We anticipate that this growth will be
sustained for three years and then decrease linearly during a seven-year stage two to a terminal
growth rate of 2.00%- the GDP growth rate. Our ten-year extraordinary growth assumption
comes from Cheesecake Factory’s long-term growth plan. According to their 10K, they expect
that the United States can currently sustain 300 Cheesecake Factory locations. There are now
214 locations open, and they opened six stores in the last year and 8.5 stores annually on average
over the previous four years. Thus, their current primary method of growth will sustain growth
and not unreasonable relative to their historical (and downward trending) average EBIT margin
of 7.57%. After taxes, which remain assumed at 13.5% annually, an adjustment is made to the
FCFF for the lease expense and depreciation. Lease expense for the first five years comes from
Figure x and is assumed to be equal to the average of the five payments each year after that.
Depreciation of the leased asset is assumed to be straight-line over ten years and is thus equal to
10% of the leased asset annually. Both depreciation and lease expense are assumed to continue
similar to their current amounts after ten years as Cheesecake Factory adds on more locations.
The full FCFF model is provided in Figure 11 in the appendix. After a firm value of
$4,409,603,412 is calculated, the market value of debt (including the value of operating leases) is
removed, and the remaining equity value is divided by the number of shares to arrive at an
SENSITIVTY ANALYSIS
For sensitivity analysis, we focused on beta, short stage growth rate, terminal growth rate
and EBIT margin ratio for the company. The betas for the firms used in the comparable analysis
ranged between 0.45 and 0.8. We used this range to produce our WACC range of 4.00% and
The interval for stage 1 growth is 2.5% to 8.3%. The lower bound is the lowest that would
be reasonable in a 3-stage model with a stage 3 growth of 2.00% and the upper bound is the
maximum one-year revenue growth over the previous 10 years. The results of this analysis can
and found the high value is 13% and the low value is 5.8%. Therefore, we chose 5.8% to 13% to
be the range for our analysis. The output for this sensitvity analysis is shown in Figure 14.
The final variable we sensitized is terminal growth rate. The lower bound is the current
GDP growth rate rounded down to a value of 2%. Because the firm cannot grow faster than the
whole economy in the long run, the terminal growth rate should be equal to or less than GDP.We
anticipate that long-term, annual GDP growth could be as high as 4%. We did the sensitivity
analysis for the stock price by using the WACC range that is 4% to 6% and terminal growth rate
range 1% to 4%. The results of this sensitivity analysis can be found in Figure 15.
INVESTMENT THESIS
We believe based on our Cheesecake Factory evaluation that the stock is undervalued and
the stock’s growth prospects over the next six months to a year look positive. The stock price as
of December 31, 2017, was $47.01. Our discounted cash flow analysis derived a share price of
$70.85, and our relative valuation analysis originated a range of share prices of $49.26 to $60.72.
The range of share prices was calculated by regression methods using ratios to determine the
Cheesecake Factory has been working on new projects to increase growth. The company
currently has ten restaurants operating internationally and plans to open up 22 more restaurants
outside the U.S in the next five years. Cheesecake Factory is also developing new restaurant
concepts such as North Italia and Flower Child, to diversify their culinary portfolio. The
company plans to enter into the home consumer packaged goods industry to allow customers to
buy Cheesecake products in grocery stores. These growth prospects have the potential to
gradually increase the Cheesecake factory’s stock price in the next year because they present
new opportunities for the company. The new opportunities are not expected to create dramatic
Cheesecake Factory has recently had a consistent edge over its competition. The
company menu features a variety of food choices and is complemented by a modern restaurant
setting that is popular amongst Cheesecake Factory supporters. Internally the company has been
rated one of the best to work for and has paid a consistent dividend to investors over the past five
years. Cheesecake Factory’s success faces challenges when the economy declines and when
competitors lower their prices. The restaurant chain is not considered upscale, but is also not a
cheap option for consumers. If competitors lower their prices or if the economy falters
Cheesecake Factory’s sales growth becomes at risk and is likely to decline. The stock market has
been volatile recently and has caused the stock to slip slightly, but we feel that it will rebound
An investment in Cheesecake Factory has substantial value. The company dividend has been
consistently increasing over the past five years and is projected to stabilize in the long term.
Sales growth has also been consistent as the company is at the top of its grouping in comparison
to its competitors. We recommend buying Cheesecake Factory stock because of its growth
prospects and consistent revenue growth. Our projected price target over the next six to 12
CONCLUSION
After careful evaluation of Cheesecake stock’s fundamentals, we believe that buying the
stock will be beneficial to investors. Investors will reap the benefits of a consistently growing
dividend and can remain confident that revenues will continue to grow each year which will
Fig 10: The future minimum lease payments in thousands on the operating leased asset. (From
Fig 11: FCFF model. All numbers besides value per share are in millions