Morgan Stanley Believes BJ's Restaurants Valuation Is 'More Reasonable, Stock No Longer A Sell

• BJ's Restaurants, Inc. BJRI has seen a 15.73 percent decline in its share price over the last six months.
• Morgan Stanley’s John Glass has upgraded the rating on BJ’s Restaurant from Underweight to Equal-weight, while maintaining the price target at $45,
• The stock valuation appears “more reasonable” now, as compared to its peers and its historical average.

Although the company’s “margin story has played out well,” Glass would prefer to wait for signs of more consistent improvement in same store sales before becoming more constructive on the stock.

According to the Morgan Stanley report, “2015 is playing out much as we had anticipated: solid, if already appreciated improvement in margins,” which have been driving EPS growth of more than 40 percent, year on year.

However, same store sales have been “more muted, especially post the 1Q, with tougher 2H and early '16 compares ahead,” the report said.

With regard to margin improvement, the management has guided to margins over 19 percent for 2015, with LTM restaurant level margins having already reached 19 percent.

“These margin gains have been driven by comprehensive productivity initiatives including reducing kitchen and menu complexity,” Glass explained.

Same store sales have also improved over the past few quarters but are still muted, as compared to BJ’s Restaurant’s peers. Traffic still needs to see more consistent improvement. However, Glass expects more difficult traffic comps in 2H as well as the potential of the holiday shifts negatively impacting traffic.

The EPS estimates for 2015 and 2016 have been raised.