Wedbush Remains A Del Taco Bull Despite Disappointing Quarter

Mexican-American quick service restaurant chain Del Taco Restaurants Inc TACO reported disappointing third quarter results Monday afternoon which could result in a "realistic bar" moving forward, according to Wedbush.

The Analyst

Wedbush analyst Nick Setyan maintains an Outperform rating on Del Taco with a price target lowered from $13 to $11.

The Thesis

Del Taco's management offered some fourth quarter to date commentary which points to a sequential improvement in comp trends, Setyan wrote in a note. In addition, management's full-year 2019 same-store sales growth guidance of 1.0% (prior low-single-digit) still suggests a slight improvement on a two-year comp basis.

Same-store sales growth in 2019 can be achieved through management's continued focus on value ($2 for three items and $2 breakfast wrap), along with new menu items like plant-based alternatives, Carnitas, and Pork Tamales. Beyond 2019 the company can benefit from a menu price increase and the launch of a third-party delivery platform (DoorDash in Q4).

Management's low-end of 2019 margin guidance range of 17.1% to 17.4% looks realistic and the same can be said for management's EBITDA guidance range of $63 million to $65 million.

Finally, the research firm's revised $11 price target is based on 9.3 times EV/EBITDA on 2020 EBITDA estimates which represents a 10% discount to regional peers. The discounted valuation implies upside from current levels but also factors in a lower franchised mix and lower EBITDA and same-store sales growth.

Price Action

Shares of Del Taco were trading lower by more than 15% Tuesday and hit a new 52-week low of $8.12.

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