DAVE?s Risks Overshadow Discount
In our view,
Famous Dave's of America (
DAVE) has the potential to grow earnings at a compound average annual rate of 20% over the next five years. It can achieve this by growing units at an average rate of 15% annually, increasing same-store sales at a rate of 2% to 5% per year through price increases and rising unit volumes, leveraging G&A expenses, and repurchasing shares.
However, while we think the stock is cheap relative to its growth rate, in our opinion the discount does not compensate for its inherent risks at this time. Famous Dave's is aggressively expanding at a time when falling traffic and rising costs are squeezing profit margins, leaving the stock particularly vulnerable to earnings shortfalls. We would wait to see improvement in comps of the franchise system before buying the stock.
The company is launching a system-wide marketing effort to promote its catering business. We think both revenue streams have the potential to continue growing faster than the dine-in segment, with to-go in particular benefiting from the trend of time-crunched Americans cooking less.
Dave's Smokehouse prototype has a separate to-go entrance, which we think will bolster to-go sales. As revenue grows, we think Dave's will be able to leverage its outsized G&A expenses, which are now nearly 14% revenue, well above the industry average of roughly 8.5%.
In the first half of 2008, food and labor costs as a percentage of sales are expected to rise 30 to 40 basis points year-over-year. In order to alleviate the margin pressure for the remainder of 2008, the company intends to raise prices again in the range of 1% to 1.5%. Another area of concern is declining same-store sales in the franchised restaurants. Comp sales have been declining for the past three years, with a decline of 4.8% for 1Q08.
Everest Re Approaches Q2 Report as a Hold
We maintain our Hold recommendation on shares of
Everest Re Group, Ltd. (
RE). The company intends to release its 2Q08 earnings after market close on Jul 21, 2008.
To date, the casualty segment continues to experience rate pressure from increased competition, demands for higher ceding commissions and relaxed returns, with ceding companies retaining more net business. Competition is much tougher in the US than in other markets internationally.
However, the company continues to benefit from strong underwriting skills, a multi-operating platform, vast geographic coverage and strong financial strength ratings. Once the company establishes a representative office in Brazil, we would then expect RE to capitalize on the legal changes in that insurance marketplace, considering the economic growth expected for Brazil in coming years.
On Jan 17, 2008, the company completed its asbestos reserve study and concluded with a net pretax charge of $311 million related to asbestos loss reserve strengthening.
