Bojangles' Stock Will Drop Below $10 In 2018

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The restaurant sector is under pressure and Bojangles’ (NASDAQ:BOJA) is not immune to a declining traffic. It is a competitive industry that is not able to increase prices to offset negative traffic and rising operating expenses such as healthcare/labor.

BOJA is facing an additional problem: 45% of its COGS is chicken (15-16% of revenue). For the current year, management hedged around 60-70%. Hence current margins do not fully reflect the ongoing increase in chicken prices. Chicken meat is considered healthier than red meat and a lot of restaurants focus on serving chicken meat to satisfy growing demand. Hence, the demand for chicken is growing in the US as well as globally. On the supply side, chicken meat producers are printing cash at the moment since demand growth outpaces supply growth and chicken margins are high. Processing facilities are running at full capacity, and even building new barns and ordering additional chicks takes up to 18 months. The whole supply chain of chicks is dynamic and increasing the size of the supply flock takes time and ultimately it takes more than a year until the increased supply capacity would flow through to production figures.

I expect restaurant contribution margins to fall below 12% in 2018 from 16.2% guided for fiscal 2017.

Comps

2012

2013

2014

2015

2016

2017

Company

8.4%

4.5%

4.0%

3.60%

1.1%

-2.0%

Franchise

6.2%

1.4%

5.0%

4.40%

1.5%

-1.0%

Systemwide

7%

3%

4.6%

4.10%

1.30%

Source: Company Filings & Guidance

As you can see in this table, SSS has been decelerating year over year. Advent timed the IPO almost perfectly. However, because of the low trading volume and headwinds, it was not able to sell all its equity interest in time. Now it still holds 51% of the shares outstanding. This year’s comps look better than the underlying trends: raising prices and benefiting from a mix shift is not sustainable. In a competitive environment, hardly any company is able to raise prices to keep margins at a healthy level. Comps will be negative 3-5% in fiscal 2018 if trends continue. BOJA’s margins will suffer because of its high fixed costs. The company will have positive free cash flow even after a margin hit, but the problem is valuation.

Because of worse store economics, the company is opening fewer units and hoping for improvements. This is a smart move and what Kona Grill (NASDAQ:KONA) should have done a long time ago:

At $13.50/share, you are paying a P/E of 17 for the current year. Next year, the stock would trade at a P/E of 24 and an EV/EBITDA of 11.5x. The business is under pressure, and its multiple and stock price have to adjust accordingly. With $0.57 in earnings, a share price above $10 does not make any sense. Basically, current shareholders are hoping for a multiple expansion for a business whose fundamentals are deteriorating and whose EPS is declining.

Rest 2017

2018

2019

2020

2021

NI

32.1

21.9

23.5

25.3

27.2

DA

17.1

17.6

18.1

18.7

19.3

CAPEX

(9.5)

(9.8)

(10.0)

(10.4)

(10.7)

NOWC

(1.4)

(1.4)

(1.7)

(1.9)

(2.1)

FCF

14.9

28.3

29.9

31.7

33.7

Free Cash Flow Yield

5.4%

5.7%

6.1%

6.5%

EBITDA

73.0

57.8

59.5

61.5

63.6

Net Debt

127.2

98.9

69.0

37.2

3.5

1.74

1.71

1.16

0.61

0.06

Source: Model based on my assumptions and historical metrics

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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