BJ's Restaurants: Expensive But Worth It

By Will Ashworth | October 21, 2011 AAA

Despite the weak economy, a number of restaurant stocks are having a good year so far in 2011. Six operations are up double-digits as of October 20. BJ's Restaurants (Nasdaq:BJRI), both a restaurant and a brewery, was the fourth-best performer year-to-date at 37.9% and showing no signs of slowing down. While it might be expensive, I'll explain why it's worth owning.

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Six Best Performing Restaurant Stocks - YTD October 20, 2011:

Company YTD Performance Market Cap
Domino\'s Pizza (NYSE:DPZ) 91.5% $1.86B
Chipotle Mexican Grill (NYSE:CMG) 45.0% $9.65B
Buffalo Wild Wings (Nasdaq:BWLD) 41.8% $1.14B
BJ\'s Restaurants (Nasdaq:BJRI) 37.9% $1.35B
McDonald\'s (NYSE:MCD) 18.6% $91.84B
Papa John\'s International (Nasdaq:PZZA) 17.4% $823.03M

Stock Performance
With the exception of Chipotle, I can't think of a restaurant stock that's been hotter than BJ's Restaurants the past three years. It's up about 70% annually, which compares very favorably with the former McDonald's investment. Over 10 years, its annual total return is 26.4% - double that of the restaurant industry as a whole and almost eight times the S&P 500. The question is whether it can keep it up. I don't see why not. It's still expanding, and its concept continues to draw the customers. Even in the tough times in 2008 and 2009, it's managed to outshine its competitors, delivering comparable restaurant sales declines of only 0.3% and 0.8%, respectively. In 2010, it bounced back nicely with 5.6% comps and in the first three quarters of 2011, its delivered comps of 7.8% in Q1, 7.3% in Q2 and 6.5% in Q3. Its comparables are at historic levels. (Get a better taste of this industry by reading How To Analyze Restaurant Stocks.)

Earnings
BJ's Restaurants released third quarter earnings October 20 and they were good. Revenues grew 17.6% to $151 million with non-GAAP diluted earnings per share of 24 cents, an increase of 20%. It ended the quarter with $40.3 million in cash, zero debt and book value per share of $10.91. For the first nine months of the year, revenues grew 17.6% to $448 million with diluted earnings per share of 75 cents. While the company did not provide guidance, analysts expect revenues of $614 million for all of 2011 with diluted EPS of $1.09. Since 2005, its revenues and operating income have grown at compound annual rates of 24 and 22%, respectively. If BJ's stops growing, it will be because Americans have stopped drinking beer and for no other reason.

Expansion
At the end of the third quarter, it had 112 restaurants open with about half in California and the rest scattered in 13 other states. Its long-term plan is to get to 300 restaurants, opening approximately 12 or 13 every year. Near-term expansion will see one-third of the openings in its home state of California, another third in Western states outside California and the remaining third will be in Florida and/or new markets. Most of its "Brewhouse" format are 7,000 to 10,000-square feet and generate upwards of $5.5 million (when mature) in two to five years with a "four-wall" contribution (operating cash flow) of up to 20%. Given the average store costs $3.8 million to build, a performing restaurant will pay for itself in three to five years. In the meantime, it has plenty of cash to keep growing. (For more insight into expansion, read Is Growth Always A Good Thing?)

The Bottom Line
BJ's Restaurants is one expensive stock. It's also a best-of-breed restaurant concept, and people will always pay for quality.

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