Habit Restaurants Could Be At A Scrumptious Entry Point

Piper Jaffray analysts Nicole Miller Regan and Joshua C. Long traveled with Habit Restaurants Inc HABT’s management – including CEO Russ Bendel and CFO Ira Fils – this week, and left feeling optimistic about the company’s outlook, encouraged by two-year comp and margin trends.

Thus, they reiterated an Overweight rating and $40 price target on the stock, on the belief that the shares present “a particularly compelling entry point,” especially as their analysis suggests the market is pricing in future unit pipeline growth close to zero.

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The note highlights two points central to the investment thesis:

• The market’s concerns regarding third-quarter comps are overblown. The experts noted that, in observing other award-winning concepts, it is their belief that “companies generally have an ability to hang on to the comp benefit, even if only partially, or give back little traffic.” Consequently, the firm adjusted estimates to a more realistic level. Expectations now point towards a same-store sales estimate of (1.5 percent), which implies a +15 percent two-year trend, versus +19 percent in the first quarter and +15 percent in the second quarter.
• For the third quarter, Piper Jaffray projects revenue growth of 20 percent, to $57 million. They anticipate seven new company-owned restaurant openings and two new franchised restaurant openings, and “factor in 100 bps of store-level margin pressure at 20.8 percent of sales, while 1H15 margins did improve y/y (30 bps in 1Q and 180 bps in 2Q).”