Everyone is looking for mouthwatering ideas… the kind that
just make you drool since they are so enticing. I have three
of them, and they will excite you on multiple levels.
Hopefully you are not reading this article on an empty stomach….
Let Them Eat Cake
Cheesecake Factory (CAKE) recently appeared on my
radar screen even though I have been going to this restaurant
and the Grand Lux for several years. My personal favorites
include the baked potato soup and just about anyone of the
“Glamburgers” they have on the menu.
Beyond all the good food, investors will enjoy a solid
earnings history. Over the last 18 earnings reports, the
company has twice missed and twice met the number, all the
other times have been a positive earnings surprise. The most
recent earnings release was in late April for the March 2013
quarter. The company beat the Zacks Consensus Estimate of
$0.42 by a nickel for an 11.9% positive earnings surprise.
The June quarter is carrying some big expectations, with
analysts calling for revenue of $475M and EPS of $0.57. Just
meeting this number would make for a highly favorable
comparison to the year ago revenue of $455M and $0.51 in EPS.
The growth is likely due to a stronger consumer that has
more discretionary income.
Estimates for CAKE have been inching higher over the last
several months. The Zacks Consensus Estimate was sitting at
$2.14 in March and has pushed higher to $2.16 in May and is
now at $2.17. The same could be said of the 2014 Zacks
Consensus, with the number moving from $2.43 to $2.46 to
$2.47 over the same time period. That implies a 13.8% growth
rate for earnings.
The valuation for this Zacks Rank #2 (Buy) stock are right in
line with the industry average for most every metric. A 20x
forward earnings multiple is slightly higher than the 17x
industry average, but what I like to see is CAKE’s higher net
margin (5.6%) compared to the industry average (3.6%). Along
with the 13.8% earnings growth rate, analysts are looking for
7.5% growth on the top line, and that is 33% above the 5%
Don’t be Chicken
Pilgrim’s Pride (PPC) is a chicken producer that is another mouthwatering play. It is not clear if they are a supplier of CAKE, but they are for Yum Brands, Wendy’s, Burger King and ConAgra Foods. On the retail side, PCC sells to grocers like Walmart, Publix, Kroger and SuperValu among others.
I have seen some tangential evidence of a good quarter upcoming for PPC. There have been channel checks that suggest several restaurants like CAKE and specifically BWLD are trending ahead of expectations. Especially when a name like BWLD is mentioned to have good things coming due to their reliance on chicken wings in particular.
Estimates for FY2013 have been moving higher and higher. The
2013 calendar year started out with the Zacks Consensus
sitting at $0.86, but that number jumped to $1.31 in April,
and then again to $1.49 in May and now sits at $1.65. That
is some excellent growth of nearly 100% in just six months.
The picture for 2014 is a little less clear, but still shows
some growth. The Zacks Consensus for next year started the
year at $1.18 and ticked higher to $1.22 in April. A big move
up to $1.41 the following month and a subsequent move to
$1.47 at the current level.
The valuation picture for PPC is a good one. With a trailing
PE of 20.8x the stock trades at a very small premium to the
industry average of 19.5x. Not that great, but not that bad
either. The impressive valuation metric is the forward PE of
9.3x compared to the 18x industry average. That is a
significant discount for such a large player in the industry.
The price to book of 4.1x carries a small premium to the
3.6x metric for the industry. Price to sales of 0.5x is only
a fraction of the 2.4x industry average, so lots of room to
Now That You Gained All That Weight
(HLF) makes a supplement for consumers that feel like all that chicken they have eaten at CAKE and supplied by PPC is starting to form a spare tire around their mid-section. Don’t think the supplement alone will help you lose the extra weight, you need to exercise as well!
HLF has been the subject of two major short attacks over the last year and a half. First David Einhorn got on the earnings conference call and asked about the company tracks the sales of its marketers. The multi-level marketing model wasn’t clear to most investors and the stock was hurt. Then Bill Ackman came into the mix later in 2012 year and said the company was an outright fraud and needs to be investigated by the FTC.
Dan Loeb and Carl Icahn are both large scale buyers of the stock, so with the shorts there are some longs. Loeb is mostly out of the stock by now, but Icahn is still in the stock in a big way.
HLF has a great history of beating the number. I would go so far as to say it’s a perfect record with 27 straight positive earnings surprises. The most recent report saw a beat of $0.20 or an 18% positive earnings surprise. The company also beat on the top line as well and has done so in each of the last 16 quarters (4 years).
Estimates for HLF have been moving higher throughout the year. Starting the year at $4.64, the Zacks Consensus Estimate has just moved higher throughout the year. A big pop came April, following the earnings release, when the number moved to $4.77 and has since ticked higher to $4.81. Over the same time period the 2014 Zacks Consensus Estimate has moved from $5.19 to $5.50 and is now at $5.52.
The valuation for HLF is a great one, with nearly every metric investors look to showing the company trading at a discount to the industry average. The 10x forward PE is one that might even get value investors interested in the stock! The only metric that is a little heavy is the price to book, but that concern goes out the window when the 14% topline growth rate for this year is nearly triple that of the industry average. The net margin of 11.5% is also nearly triple that of the industry average which comes in at 3.6%.
Mouthwatering stocks don’t just have to be about food, they can be about weight loss too! The key is to find stocks that have a high Zacks Rank and exhibit great growth prospects and good valuations.
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Brian Bolan is a Stock Strategist
Zacks.com. He is the Editor in charge of the Zacks Home Run Investor
service, a Buy and Hold service where he recommends the
stocks in the portfolio.
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a risk limiting strategy.
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