'A Lot Of Growth Ahead,' Buckingham Sees 22% Upside For Zoe's Kitchen

Zoe's Kitchen Inc ZOES offers investors an "attractive opportunity to participate in one of the best unit growth stories in the restaurant space," according to a note from Buckingham Research, which started coverage of the stock with a Buy and $45 price target (22 percent upside).

"We like the company's differentiated concept (a Mediterranean inspired menu in a fast-casual environment), its unit level economics and LT opportunity," analyst John Zolidis wrote in a note.

Strategic Success

The company's strategy ensures that it has only a few direct competitors, better real estate access and stands out in the consumer's mind. Further, the analyst noted that the restaurant's "better-for-you menu choices are consistent with current consumer trends shifting toward healthy eating."

Related Link: Hot Earnings, Tepid Rating; Deutsche Bank On Zoe's Kitchen

The numbers tell that the company's concept is a success, as the average comparable-restaurant sales growth over the past five years was 9 percent. The company has reported 23 consecutive quarters of positive comps. Last year, same-restaurant sales grew 6.3 percent. The first quarter comps rose 8.1 percent versus 7.7 percent in the same period last year.

"We are forecasting 20+ percent unit growth in each of the next two years and believe the concept's base will double by FY20. Over a longer-term horizon the company believes 1,600 locations could be possible," Zolidis noted. Currently, Zoe's has less than 200 locations, most of which are located regionally in the South and Southeast.

In addition, the analyst believes that Zoe's can beat near-term Street forecasts. The analyst forecast a 9 percent EBITDA margin in the current year, but estimates a low teens EBITDA margin is likely with greater maturity. For 2016, Zolidis expects EPS of $0.14, in line with consensus, and sees $0.24 EPS (consensus: $0.25) for 2017.

"Mostly, we are positive on the shares as we believe there is both near-term upside to analyst estimates and significant LT upside to EBITDA margins," Zolidis added.

Shares of Zoe's Kitchen closed Thursday's regular trading session at $37.75.