Analyst: This Is Why We're Buying Chuy's Holdings

Stephens analyst Will Slaubaugh said he is buying Chuy's Holdings Inc CHUY, as sentiment has bottomed out. The analyst noted that the company's shares have lost about 25 percent since its May 4 conference call following Cheesecake Factory Inc CAKE's negative pre-announcement, which stirred up worries concerning the casual dining sector and the lowering of the outlier Street estimates for Chuy's to unreasonable levels.

Cheesecake pre-announced on June 13 that it expects second-quarter comparable-store sales to decline 1 percent, which it said would impact margins and earnings per share.

From around $31 on May 4, Chuy's stock has shed about 24 percent.

Return To Positive Comps Likely In 2H07

The negative low-single-digit range quarter-to-date same-store sales trend the company suggested on the first-quarter conference call, according to Stephens, reflected the general malaise in casual dining and continued softness in some of the company's core markets.

That said, the firm believes Chuy's "tried and true" formula of high-quality food and service at an attractive everyday value will help the company to return to positive comps by the second half of 2017. The firm feels the sell-off in the shares as unwarranted.

Historically, Stephens noted that Chuy's same-store sales outperformed peers by an average of 280 basis points. Although conceding that the gap has turned negative recently, the firm said it believes even lower expectations on a two-year trend will help it reach positive levels in the second half.

Incremental Growth Drivers

The firm is of the view that Chuy's new large market strategy, combined with backfilling proven markets would deliver attractive AUVs, increased brand awareness and strong ROIC. The firm also sees off-premise as an incremental sales driver, as it has grown by double-digit in recent quarters, with delivery also having the potential to be a driver over time.

Lowering Estimates On Near-Term Softness

Stephens lowered its second-quarter same-store sales and adjusted earnings per share estimates from -0.5 percent to -1.3 percent and earnings per share estimate from $1.05 to $0.31, on near-term softness. The firm also reduced its 2017 same-store sales estimate from 0.6 percent to -0.1 percent and earnings per share estimate from $1.11 to $1.05. The firm expects 2018 earnings per share of $1.18 and same-store sales of 1.1 percent.

Significant Room For Sentiment/Valuation Improvement

As such, Stephens maintains its Overweight rating on Chuy's Holdings, but lowered its price target from $35 to $32. The firm noted that Chuy's valuation is among the lowest of the casual dining companies it covers.

"Despite 1H17 SSS softness, we continue to see CHUY as one of the more consistent casual names overtime, whose double-digit unit growth profile is being dramatically discounted vs.no-growth peers," the firm said.

While noting that it is the only Buy on the Street, Stephens said it sees significant room for sentiment/valuation improvement, as comparisons ease and same-store sales return to their usual positive, low-single-digit territory in the second half.

At the time of writing, shares of Chuy's Holdings were down 1.91 percent at $23.15.

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