There Seems To Be A Disconnect Between Del Taco's Fundamentals And Its Valuation

Wedbush Securities maintains its Outperform rating on Del Taco Restaurants Inc TACO ahead of its third-quarter earnings on October 17.

The brokerage believes there is a disconnect between Del Taco's category-leading fundamentals and its category-trailing valuation.

“We believe the company's current discount to QSR peers is poised to narrow as management continues to execute toward annual guidance, and as investor awareness of TACO's compelling fundamentals increases,” Wedbush analysts wrote in a note.

For the third quarter, Wedbush expects EPS of $0.13 on revenue of S102 million. The consensus expectation is for EPS of $0.12 on revenue of $102 million.

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The brokerage’s checks show SSS growth in-line to above 3.7 percent, driven by new menu items such as the "Del Taco." Wedbush’s third quarter and fourth-quarter comp assumptions remain at 3 percent and 4 percent, respectively.

Wedbush noted that the continued comp momentum in the third quarter puts high end of 2016 EPS guidance within reach and sees high degree of visibility into 2017 SSS growth drivers.

“We expect higher marketing spend, successful LTO's, multiple line extensions, and effective use of a barbell strategy to drive mix and transaction growth above our current estimate of flat for each,” the analysts added.

Meanwhile, Wedbush expects a flat commodity basket in 2017 before menu price increases and anticipates about half of 2016's minimum wage impact in 2017.

In Friday's morning session, shares of Del Taco were up 0.54 percent to $12.19, but at last check, the stock was down 1.16 percent at $11.98. The brokerage has a price target of $15.

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