Gerald (and other BREW investors):
I do not understand the downgrade either. [Does anyone have access to the Needham & Co. report?] After hearing the news, I went back and double checked the company stories in the past few months. The check confirms my earlier observation that the company is doing better and better. Here is a brief summary of the re-examination.
I: Improvemnet in the past three quarters
The first quarter over quarter improvement showed up in 96Q3 when BREW had an improving EPS comparison (0.16 vs. 0.14) However, much of the improvement was due to the lower tax rate used in 96Q3. The real improvement showed up in 96Q4 in which BREW showed growth in both the net income and the income before tax, even a higher tax rate is used. Then, the story gets even better for 97Q1. In this quarter, in addition to revenue growth, the company shows a LARGER income growth, which means that margin is improving. Besides, BREW has a 2% increase in same store sale -- we have not seen this for a long time. The cash flow increases as well -- according to the management. Thus, we see that the company is doing better and bettr since 96Q3.
II: Growth Outlook:
The financial community estimates that BREW will grow at 25% per year for the next three years. The company's expansion plan for 1997 is on schedule. As a matter of fact, 97Q1 had more than its share in new restaurant oepning in 1997. In addition, according to the management, the sites for remaing restaurants to be opened in 1997 have been selected. Thus, it is clear that the company can carry out its expansion plan for 1997.
In late 1996, BREW re-organized its management so that Old Chicago and Brewry will be two separate divisions. In 1996-10K, the company mentioned that it is going to start franchising the Old Chicago concept. In the area of Brewry, in addition to the expansion of the company restaurants, it is going to expand along its partnership with the Big River Grill -- a successful venture that BREW entered in 1996. Thus, it is clear that the management has some good ideas on long term development as well.
III: Possible Clouds
The major negative factor in the company's business is competition. There are just too many restaurants and too many micro-brewers. It can be expected that some kind of consolidation will set in. If the shake-out and consolidation do appear, one can confidently bet that BREW will survive in the consolidation process, given the fact the competition has been with us and the company has been improving in the past three quarters.
The other negative is the possibility of wage increase. Given the tight labor market and given the fact that another minimum wage increase is going to land in later this year, the labor cost could go up, particularly given that the whole industry is very competitive and it might be difficult to pass the increased cost to the end consumers.
[These factors have been with us for a long time. I doubt they are the reasons why Needham and Co. downgraded the company.]
IV: valuations
From the valuation point of view, the company presents a very compeling story: It has a book value of more than $8. At the present price of $9 7/8, it trades at a trailing p/e of 18, and a p/e of less than 15 based on 1997 earning estimate. Such a p/e is compared with the 25% growth rate for the top line, and a higher growth rate for the bottom line.
Comments are welcome
Steven |
