Wedbush Adds Del Taco To Its Best Ideas List

• Shares of Del Taco Restaurants Inc TACO have appreciated 6.89 percent year to date, from $9.73 on December 31. 2014.
• Wedbush’s Nick Setyan has maintained an Outperform rating and price target of $20 on the company.
• While adding the stock to Wedbush’s Best Ideas List, Setyan mentioned that there was a meaningful gap between the company’s “compelling” fundamentals and its current stock valuation discount.

Analyst Nick Setyan believes Del Taco Restaurants “current discount to QSR peers is poised to narrow as management continues to execute ahead of expectations, and as investor awareness of TACO’s compelling fundamentals increases.”

The stock is currently trading at a 34 percent discount to the peer average, which is the lowest valuation in the QSR segment.

On the other hand, Setyan noted that recent checks of 10 percent of Del Taco’s company-owned locations suggest same store sales growth of 5-6 percent in Q4, above the estimate and the guidance.

“New product platforms and line extensions, in particular the introduction of carne asada items and the Fresh Avocado platform, continue to contribute,” according to the Wedbush report.

In addition, there is high visibility into the company’s best-in-class same store growth in 2016. Del Taco’s unit growth for 2016 also compares favorably against its QSr peers, while unit growth acceleration is expected in 2017 and 2018.

In fact, Setyan believes that there could be further acceleration in unit growth in 2018, driven by “compelling unit economics.” “Unit-level margins are among the highest in QSR and compare favorably even with fast casual, while build-out costs are among the lowest,” Setyan said.

The stock also appears undervalued in terms of a “theoretical scenario” where all the existing co-owned locations are refranchised.