Wall Street Disagrees Over Cheesecake Factory

• Shares of Cheesecake Factory Inc (NASDAQ: CAKE) have declined 6.69 percent over the last three months, touching a low of $50.71 on October 23.
• BTIG’s Peter Saleh has upgraded the rating on the company from Neutral to Buy, with a price target of $60.
• The upgrade in the rating is based on Cheesecake Factory’s consistent sales, as well as its conservative 2016 guidance. Saleh believes that there is potential for earnings upside.

Analyst Peter Saleh mentioned that there could be “pressure from labor inflation and tough sales comparisons in 1Q16 but believe higher menu prices, benign food costs and operating efficiencies can offset these items.”

Saleh believes that lower capex in 2016 could lead to meaningfully higher share buybacks, which would provide further support to the stock.

The company reported its adjusted EPS in line with the estimates and at the higher end of the guidance, driven by a lower tax rate and a decline in G&A, which was partially offset by a decline in total sales.

Comparable sales increased marginally ahead of the estimate, with management indicating that while comps remained consistent through the quarter, the Western geographies delivered the strongest performance.

Restaurant level margins increased in line with the estimate, “driven by lower cost of sales primarily due to dairy relief and operating costs while labor expense was flat,” Saleh reported.

The EPS estimate for 2015 has been increased slightly, following the results, while the EPS estimate for 2016 has been lowered to reflect lower unit openings as well as higher labor inflation.