Wedbush Views Strategic Review By Fiesta Restaurant's Board As A Positive

Wedbush thinks Fiesta Restaurant Group Inc FRGI shares are trading at a discount at current levels, which isn't warranted since the valuation failed to reflect the future cash flows from fresh units. The firm termed it as a positive one referring to the restaurant firm's strategic review.

The discount is also expected to fade citing the gains from a lowered growth rate in 2017 and that same-store sales growth stabilizes in the immediate term. The brokerage expects the company to deliver EPS of $0.33 and $185 million revenue for the third quarter, which is higher than the consensus estimates of $0.31 on $183.9 million revenue.

The firm cited the following key factors to back its investment thesis:

• Enhanced leverage of debt/EBITDA
• Possible positive cash flow from Texas locations
• Restricted future unit growth where there is negative cash flow
• Enhanced focus on slashing G&A and D&A with restrict unit growth pace

In a note, Wedbush said, "While it is highly unlikely all 38 TX units are closed in the near term, we believe a combination of keeping some stores that have potential and closing the least profitable ones by the end of 2017 could fully benefit 2018. We estimate the total potential accretion from such a move inclusive of G&A and D&A reductions as $0.26-$0.53."

Wedbush thinks the company could still gain $0.03 even if there is no development in Texas. As a result, the brokerage retained Outperform rating and target price of $32 implying more than 25 percent upside potential.