Wells Fargo Cuts Cheesecake Factory's Price Target On Lower Outlook, Higher M&A Risks

Cheesecake Factory Inc CAKE reported its quarterly results short of expectations and lowered its full-year guidance. What grabbed headlines was the company’s announcement of two acquisitions, which increases risk in the near term, according to Wells Fargo.

The Analyst

Wells Fargo’s Jon Tower maintained a Market Perform rating on Cheesecake Factory, while reducing the price target from $47 to $46.

The Thesis

Cheesecake Factory announced the acquisition of the North Italia concept, which was expected, but surprisingly also announced plans to acquire Fox Restaurant Concepts, Tower said in the note.

The company plans to acquire North Italia (NI) and Fox Restaurant Concepts (FRC) for a total of $440 million and expects the transaction to be neutral to 2020 EPS and accretive thereafter.

The analyst expressed concern around the deal, citing the company’s “spotty history of M&A for restaurants in the public markets.” He added that both company-owned and franchised business models had been facing issues in operations, synergies, human capital and culture clashes.

Despite the skepticism, Tower noted Cheesecake Factory did have experience with FRC core brands, which should help the current deal become smoother over time relative to other deals in the past across the industry.

The company lowered its 2019 guidance on lower same-store sales and higher costs. Given the lowered guidance and the higher risk associated with the planned acquisition, there seems to be limited upside to the stock, Tower added.

Price Action

Shares of Cheesecake Factory traded higher by 3.2% to $44.49 at time of publishing on Thursday.