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BJ's Restaurants Inc: Gearing For An Upside?

 March 22, 2013 09:37 AM

(By Mani) BJ's Restaurants, Inc. (NASDAQ: BJRI) shares have declined 35 percent since March 2012 as estimates have been slashed and the multiple has contracted. However, the story could be gearing for upside due to an expected improvement in fundamentals.

The EPS estimates have been consistently reduced by a total of about 26 percent over the past 12 months as comps and margins have been a source of major disappointment. Wall Street now models 2013 EPS of $1.21, versus original $1.64 and $1.35 90-days ago.

BJ's Restaurants is well positioned to benefit from a recent trough in industry trends, and improving consumer metrics—especially California; easy company-specific comparisons and potential margin improvement off an investment-intensive year in 2012.

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"A 100bps change in restaurant margins drives EPS ~$0.20 and a 1% SSS change impacts earnings by ~$0.07," Oppenheimer analyst Brian Bittner wrote in a note to clients.

While the first quarter certainly could be messy with traffic down to low-single-digits and a potential restaurant margin decline of about 150 basis points (bps), sales and margins could improve nicely throughout the year.

The Street's 1.4 percent comp for 2013 appears conservative and assumes traffic declines 100+bps. This suggests accelerated weakness against an easy 60bps decline in 2012. Trends could improve throughout 2013 as the industry climbs out of February's trough, BJRI adds TV marketing and faces easiest comparisons since 2009.

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On the margins front, the Wall Street estimates further margin erosion, which may prove conservative. In 2012 restaurant margins declined 80bps owing to inefficiencies that arose from the investment-intensive nature of the business plan.

"Despite this easier compare, the Street models another 30bps decline in '13 which could prove conservative given BJRI has less investments and more strings to pull in '13," Bittner noted.

In addition, the multiples have become reasonable, with BJRI's forward P/E multiple reducing to 21 times its 2014 earnings consensus estimate. This represents a significant discount to its ten-year average of about 36 times and the 30 times the five-year average.

Investors haven't had the opportunity to buy this growth stock at 21 times since early-2009. If earnings have troughed, BJRI now could be at an attractive entry point, especially for long-term oriented investors.

"Multiple could expand above our target if comps re-accelerate, given scarcity of growth opportunities similar to BJRI (room to quadruple its footprint)," Bittner added.

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