Carrols Restaurant Group, Inc. (TAST)

High Sales and Return on Equity

This food service stock has some good bones after several owners and changes. I think it will make it to the $11 range by mid 2010.

Burger king is crap, but the Hispanic restaurants are killer

Carrols Restaurant Group is the largest single Burger King franchisee in the US, providing funding and expansion opportunities for their other 2 franchises, namely Pollo Tropical and Taco Cabana. Both of these provide truly excellent value for money. I live in Texas, with its plethora of Tex-Mex choices, and can confirm that Taco Cabana in particular more than matches an average Tex-Mex restaurant, and at a cost not much more than a fast food outlet. The majority of the Pollo Tropical restaurants are presently located in Florida, while Taco Cabana is largely restriced to Texas. Quite clearly, there is tremendous room for expansion. Carrols seems to be a relative unknown amongst the institutional crowd. Metrics are very good (forward P/E of 6.2 vs. expected yoy growth of 17.3%). My one very significant concern is debt load. There's no question that they're walking a bit of a tightrope here. Question is, will management find the right balance between expansion and debt? Until proven otherwise, I am going to assume so.

I don't know much about the Burger King franchise business, which is what this company does primarily.
However, I do know that taco cabana is a great place to eat in Tulsa Oklahoma, and probably anyplace else. It looks like the other carroll's original concept (pollo tropical) is doing better even than the cabana I have such fond memories of.
So I'll buy in at this price (half the ipo) based on the idea that those restaurants will make up a progressively higher percent of the stock's value.

Producing strong cash flow that's fueling the business, they're paying off debt, management is experienced, earnings are growing at a very nice pace and the stock is priced like the company is hardly growing. Margins have lots of room to expand and they already are improving. The company has some good restaurant operations under its belt, and with such experienced management, I'm confident they'll be able to pay off debt. This stock is simply too cheap to pass up.

Carrols Restaurant Group is a restaurant company which operates three restaurant brands in the quick-casual and quick-service restaurant segments. Carrols owns and operates two leading quick-casual Hispanic concepts, Pollo Tropical and Taco Cabana, and is also the largest Burger King franchisee, based on the number of units. The company has 542 restaurants located in 16 states through out the U.S. which includes 73 Pollo Tropical restaurants, 141 Taco Cabana restaurants and 328 Burger King Restaurants under franchise agreements.

The company reported a 6.3% increase in the revenues for the fiscal year 2006 with the comparable restaurant sales increasing at all the three concepts of the company. The demographic trends such as substantial projected increases in the Hispanic population of core markets like Florida and Texas, and other U.S. regions as well as anticipated disposable income growth for the Hispanic segment, are getting favorable for the company. These trends are expected to help the company to grow its two higher-margin Hispanic restaurant brands. The company is also expected to benefit from the large Burger King Franchise restaurant base which contributes to 50% of the company’s total revenue by leveraging its size and scale to maximize its profits.

The restaurant industry is all set for long-term sales growth with the rise of dual-income households and consumer’s increased desire for convenient meal solutions providing an attractive landscape for growth. The company is very well positioned in the restaurant market with its portfolio of brands providing geographic and profit diversification and is expected to show solid growth performance in terms of sales as well as stock price in the coming future.

It seems like a risk to add TAST as an outperform choice to my caps picks with the stock on a downward trend and reporting Q4, 2006 results on Thursday, March 1.

However, it seems likely that TAST will exceed the (few) analyst's estimates. Also, it is down 10.5% from the Dec IPO price and down 8.5% from just Feb 9th.

Regardless, estimates are for EPS of $0.85 in 2007 and $1.05. Assuming the P/E stays at its current level of 20, that gives the stock a price of $17 in 2007 and $21.00 in 2008.

Given the potential for growth, those seem conservative estimates. One watch-out is that they are heavily leveraged (aka, deep in debt). If they can manage debt as they grow, this looks like a sure winner.

Pretty risky, but too tempting to overlook.

This stock is unloved due to its complexity. Simply put, the company owns three businesses: it has a Burger King franchise business, Pollo Tropical and Taco Cabana. Being a BKC franchisee is a good place to be these days, look at the stock price. This business throws off a ton of cash flow that is then invested in the two growth concepts. Pollo is a fantastic business, well known in Florida and starting to take off in NY and NJ. Unlevered ROIC for Pollo is 25+%, easily among the best in the industry, meaning every new equity $1 in Pollo has a 25% return per year UNLEVERED Taco Cabana is like Chipotle, its food is rated as highly as Chipotle, but it hasn't grown as fast since it is not as good a concept. The unlevered ROIC here is 15%, still very good but not as good as Pollo. After hearing management and asking them questions, doing a lot of work on this name and going to Pollo Tropicals, I can say with confidence that the BKC part of the business should be worth $8-9, the Pollo piece should be worth $15-16, and Taco should be worth $13-14. Less $1 of corporate overhead and $16 of net debt, the stock should be worth $19-22 today. Basically, you get all of the BKC cash flow and get to invest it at 15-25%, generating tremendous growth. While there is a lot of debt, 95% of it comes due due in 2009/2010, so it shouldn't be a near term concern even in a downside scenario. Management is very good and highly invested (own 12% of the company). This is a clear winner that will be up significantly in the near future.