Fogo De Chao's Valuation Cited As Concern At Deutsche Bank And Credit Suisse

Analysts at Deutsche Bank and Credit Suisse initiated coverage of

, an operator of upscale Brazilian churrascaria steakhouses, with a cautious tone.

Karen Short of Deutsche Bank initiated coverage of Fogo De Chao with a Hold rating and $22 price target. According to Short, the restaurant stands out with a differentiated menu and labor model that could drive solid unit economics and support a scalable expansion story. The company also generates above unit volumes with the potential to drive further sales through new initiatives such as day part expansion and private dining. However, since the company is only beginning to expand outside of its native Brazil, Short noted the inherent geopolitical, economic and currency risk for its operations. In addition, the analyst stated that a $22 price target is derived on a 14x NTM EV/EBITDA multiple given its early growth stages. In addition, the multiple is already "modestly" above traditional casual dining restaurants based on its growth potentials.

Jason West of Credit Suisse initiated coverage of Fogo De Chao with a Neutral rating and $24 price target. According to West, Fogo De Chao could potentially quadruple its store count over time which holds the potential of driving double-digit unit growth. As such, the restaurant would rank among the sector's "best growth stories." However, the analyst noted that valuation at current levels "is our key concern." At 13.6x 2016E EV/EBITDA, shares are trading at a "substantial" premium to its restaurant peers and the overall industry. "We've found that large box, upscale chains have struggled to sustain premium valuations," West wrote. "New units are also forecast to generate volumes and returns below the existing base."