3 Reasons Canaccord Stays Sidelined On Fiesta Restaurant Group

"We are initiating on Fiesta (FRGI) with a HOLD rating given the following: (1) the entry of Pollo Tropical into the Texas market (from its home court of Florida) has been mixed; (2) we see near-term challenges related to competition, cannibalization and geographic concentration (Texas = 50 percent of the store base); (3) we believe that Street estimates are potentially too high for '17," analyst Lynne Collier wrote in a note.

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After several years of strong SSS growth, Pollo Tropical has experienced soft comps and negative traffic and Taco has had negative SSS/traffic year-to-date with SSS in July decreasing 5.8 percent.

"Given a difficult macro backdrop (50 percent of total store base in TX) and increasing competition, visibility remains low on the pace of a sales recovery," Collier continued.

However, Collier acknowledged that most of these issues appear to be priced in as the shares are presently trading at just 6.7x NTM consensus EBITDA, a significant discount to the high-growth peer group.

"As such, we see limited downside risk from current levels," the analyst continued.

That said, uncertainty around growth in Texas, traffic declines and the planned spinoff of Taco Cabana have resulted in a significant multiple contraction for Fiesta Restaurant shares in recent months.

As a result, the analyst believes clarity around these issues is needed to drive the multiple higher. Collier expects soft comps/traffic to continue near term until the macro environment improves.

For 2016, Collier projects EPS of $1.24 (-19.5 percent year-over-year) versus the Street's $1.33. The key assumptions include blended SSS of -1.2 percent (-0.7 percent Pollo Tropical and -1.7 percent at Taco Cabana), the addition of 33 Pollo and three Taco restaurants and a restaurant-level margin of 21.1 percent.

Further, the analyst's price target of $25 represents a 6 percent potential upside from the current trading level.

At time of writing, shares of Fiesta Restaurant were up 0.13 percent to $23.42.

Full ratings data available on Benzinga Pro.