BREW: an overlooked fast grower
Growth: BREW has been growing its top line at more than 30% in the past few years. It has a good management team and strategy for expansion. The company expects to grow its top line by another 25-30% for the next year. Longer term, its five year growth rate is expected in the 25% range.
Margin: After suffering a margin erosion in 95Q4 and 96Q1 due to over-expansion (relative to management team available) it has been fixing the problem and BREW has shown margin improvement since 96Q2. As it moves along, further margin improvement is expected due to leveraging overhead over a large store base, and a reduction in store opening relative to the total store base.
Value: The company has a book value of more than $8. It has more than $1 for amortation and depreciation. Given the kind of assets (land, building, furnature, etc), the book value is quite solid. As a matter of fact, it is more than solid, since land and building appreciate over time instead of having a depreciation.
Currently, the stock is trading at less than $10, basically equal to the book value plus past depreciation and amortation. The stock has a trailing p/e of 19, and a projected 1997 p/e of 15. It is very cheap based on the company's growth potential. [It is even cheap if one considers the cash flow. Based on the 96Q4 result, it has a cash flow of $0.43 per share, giving an annulized cash flow of more than $1.70. Thus, the stock is trading at less than 6 times cash flow]
Why is the stock so depressed?
There are a few reasons. A) the company had a drastic margin erosion in 95Q4, which dragged its stock from $30 to less than $10. Thus, it would take a few quarters for the company to convince the investors that it has fixed the problem. B) Restaurant industry is a very competitive business and a bad sector as far as stock is concerned. The sector as a whole losses money in 1996, a great bull market year. C) Concern on the impact of high wages, and food cost, etc.
By looking at the company operation from 96Q2 to 96Q4, it seems that the company has turns in a good performance card in growth, cost control, and margin improvement. If the company can expand and improve its margin in the competitive environment as we see now, just imagine what the company can do in a more favorable environemnet.
Summary: We have a stock here trading close to book, p/e of 15 based on projected 1997 earning, and growing at 25+%.
Comments?
Steven
ps: for a full disclosure, I am long on BREW.
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