CEC Entertainment Inc. CEC
November 26, 2001 - 10:26am EST by
allen688
2001 2002
Price: 34.91 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 975 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

This is a two-part trade that involves going long CEC Entertainment (CEC) and short Applebee’s (APPB) dollar for dollar. Chuck E. Cheese is a restaurant/entertainment destination geared for kids that has been around for over 20 years. Typical foods such as pizza, salad, sandwiches, and desserts are served. The main draw, however, is the extensive children’s entertainment options such as games, rides, and music/comic shows. There are currently 394 units (52 franchised) with the potential and plan to expand at a rate of 10% a year for the foreseeable future. CEC has had its share of problems this year and has been punished for them. They lowered F2001 earnings guidance from $2.56 to $2.50 on May 31st and reduced ’01 estimates even further to $2.22. On the first pre-announcement the stock dropped 20% and after recovering some of its losses, it dropped another 27% following the second reduction. But the earnings problem has been worked out of the stock and it trades close to its historic lows of next twelve months P/E and TEV/EBITDA. With analyst’s predictions of 20% earnings growth through unit expansion, SSS increases, cost reduction, and share buybacks; the stock has a PEG ratio of only .8. Management’s implementation of its phase 3 remodeling has been driving their SSS growth and further benefits are expected. These remodeling have included new games, rides, faster ticket counters, and menu improvements. While the results have been exciting, the costs have been fairly minimal by simply switching out different restaurants game machines rather than buying brand new ones for all units.
The second part of this trade is to be short APPB. Applebee’s has been a turnaround story this year and its shares have risen from the mid teens last summer to its current level of around $32-33. The turnaround has already occurred and the upside opportunity has virtually vanished. While the street still touts this company as a 15-20% earnings grower, the ability for earnings to be grown as this pace is questionable and the quality of those earnings are suspect. By over serving their financials a little bit closer for the past several quarters, you can see that this EPS growth is not coming from the top line. The company has been buying large blocks of their shares back, which have been accretive to EPS. While this can be a positive use of cash flow, a high multiple should not be paid for this type of growth. However, APPB biggest problems will be in its ability to grow more restaurants. There are currently close to 1400 restaurants throughout the country making it the largest casual dining chain in the world. With close to twice as many restaurants as Chili’s (EAT), APPB will be hard pressed to find new markets to enter. Once investors begin to focus on APPB future trouble in expanding EPS, the company will cease to trade at premiums to the better casual dining operators.
An opportunity like this is very appropriate for the type of environment that we are currently seeing. Without knowing the direction that the market will go in the short term due to earnings problems, layoffs, consumer confidence, or terrorism; it is much less risky to take a market neutral approach. Buying shares of CEC and shorting APPB alleviates most of this risk. A narrowing of the earnings and EBITDA multiples that these two companies trade at will result in a nice return on investment.



Symbol EAT APPB CBRL CEC

Stock Price $28.45 $32.50 $26.72 $35.00
52 week High 31.30 33.91 26.85 55.50
52 week Low 21.30 18.00 15.69 30.31
% off high -9% -4% 0% -37%
% off low 34% 81% 70% 15%

Shares Outstanding 100 37 55 28
Market Capitalization 2,831 1,197 1,470 976
Float 97 25 53 21
Short Interest 3.62 3.40 1.29 0.98
Short/Float 3.72% 13.69% 2.43% 4.61%
Avg. Daily volume (in 000s) 817 521 515 274
Avg. Daily volume $$ 23,254.7 16,944.8 13,774.1 9,598.1
SI/Avg. Daily Volume 4.4 6.5 2.5 3.6

Dividend 0.00 0.00 0.00 0.00
Yield 0% 0% 0% 0%

Book Value 9.05 8.26 15.38 11.94
Price/Book 3.1 3.9 1.7 2.9
Tangible Book Value
Price/Tangible Book

Total Restaurants 944 1286 512 390
Company Restaurants 693 285 512 336
Franchise Restaurants 251 1001 0 54
Company % of Total 73% 22% 100% 86%
Franchise % of Total 27% 78% 0% 14%

June Dec July Dec
Fiscal Year 06/2001 12/2000 07/2001 12/2000

I. P/E VALUATION
Earnings Per Share (CY)
1998 $0.69 $1.11 $1.65 $1.21
1999 0.99 1.33 1.14 1.58
2000 1.32 1.60 1.19 1.98
2001E 1.52 1.79 1.38 2.22
2002E 1.75 2.10 1.60 2.60
next 12 mos 1.67 2.01 1.57 2.51
Price/Earnings
1999 28.7 24.4 23.5 22.2
2000 21.6 20.3 22.5 17.7
2001E 18.7 18.1 19.3 15.7
2002E 16.3 15.4 16.7 13.4
next 12 mos 17.0 16.2 17.0 14.0


Cash EPS 1.75 2.10 1.66 2.60

Price/Cash EPS 2002E 16.3 15.4 16.1 13.4

Earnings Growth
1999 to 2000 33.0% 20.0% 4.4% 25.3%
2000 to 2001 15.4% 12.1% 16.4% 12.2%
2001 to 2002 15.2% 17.3% 15.8% 17.2%
1999-2002 average 20.9% 16.4% 12.1% 18.1%
2001 PE/Growth Rate 0.9 1.1 1.6 0.9
FC LT growth rate 16.25% 15.00% 13.20% 20.75%
2001 PE/IBES LT Growth Rate 1.2 1.2 1.5 0.8


Quarterly Earnings: Calendar year actual
1998a 1Q 0.16 0.26 0.39 0.42
1998a 2Q 0.23 0.29 0.56 0.26
1998a 3Q 0.13 0.30 0.42 0.31
1998a 4Q 0.17 0.26 0.28 0.22

1999a 1Q 0.20 0.29 0.25 0.52
1999a 2Q 0.31 0.34 0.21 0.34
1999a 3Q 0.27 0.35 0.25 0.44
1999a 4Q 0.25 0.35 0.20 0.29

2000a 1Q 0.29 0.37 0.25 0.68
2000a 2Q 0.36 0.41 0.42 0.44
2000a 3Q 0.35 0.40 0.30 0.55
2000a 4Q 0.32 0.42 0.26 0.33

2001E 1Q 0.34 0.45 0.26 0.88
2001E 2Q 0.42 0.47 0.48 0.43
2001E 3Q 0.39 0.44 0.35 0.57
2001E 4Q 0.35 0.44 0.31 0.35

Quarterly Earnings Growth
1999 - 2000 1Q 43.3% 25.0% 0.0% 30.8%
1999 - 2000 2Q 17.4% 21.6% 100.0% 29.4%
1999 - 2000 3Q 31.2% 13.2% 20.0% 25.0%
1999 - 2000 4Q 26.3% 21.2% 30.0% 13.8%

2000 - 2001 1Q 18.6% 22.7% 4.0% 29.4%
2000 - 2001 2Q 16.7% 13.7% 14.3% -2.3%
2000 - 2001 3Q 11.4% 10.0% 16.7% 3.6%
2000 - 2001 4Q 8.0% 3.7% 19.9% 5.4%

Change in Current Qtr Estimate (%)
One Week -0.2% 0.1% 1.2% -0.4%
One Month -2.1% -0.4% 1.2% 0.6%
Three Months -3.8% -6.8% 1.3% -4.7%
Change in FY 2001 Estimate (%)
One Week 0.1% 0.0% 0.7% -0.2%
One Month 0.7% 0.0% 0.8% -0.1%
Three Months -0.5% -2.6% 2.5% -2.2%
Change in FY 2002 Estimate (%)
One Week -0.1% -0.1% 2.4% -0.3%
One Month 0.2% -0.1% 2.4% -0.4%
Three Months 0.2% -1.3% 14.3% -3.7%

Quarterly Revenues
1998a 1Q 401 147 317 105
1998a 2Q 423 166 365 89
1998a 3Q 432 169 351 98
1998a 4Q 444 166 368 87

1999a 1Q 459 179 386 118
1999a 2Q 535 164 427 105
1999a 3Q 511 164 423 116
1999a 4Q 521 163 443 102

2000a 1Q 551 165 436 141
2000a 2Q 577 169 471 119
2000a 3Q 589 172 467 130
2000a 4Q 583 184 484 115

2001a 1Q 626 182 468 163
2001a 2Q 675 186 544 127
2001e 3Q 685 188 #N/A 128
2001e 4Q 688 197 #N/A 183
Analysts 3 3 0 2

Quarterly Revenue Growth: Year over Year
1998 - 1999 1Q 15% 22% 21% 13%
1998 - 1999 2Q 27% -1% 17% 18%
1998 - 1999 3Q 18% -3% 20% 18%
1998 - 1999 4Q 17% -2% 20% 17%
1999 - 2000 1Q 20% -8% 13% 19%
1999 - 2000 2Q 8% 3% 10% 13%
1999 - 2000 3Q 15% 5% 11% 13%
1999 - 2000 4Q 12% 13% 9% 13%
2000 - 2001 1Q 14% 10% 7% 15%
2000 - 2001 2Q 17% 10% 16% 7%

II. ENTERPRISE VALUATION
Current Current Current Current
Cash/ST Investments 13.31 14.68 11.81 13.23
ST Debt 17.64 0.82 0.20 0.12
LT Debt 231.03 79.12 125.00 44.22
Preferred/Other 0.00 0.00 0.00 0.00
Net Debt 235.4 65.3 113.4 31.1
Market Cap 2,831.0 1,197.0 1,470.3 975.8
Total Ent. Value 3,066.4 1,262.3 1,583.7 1,006.9

EBITDA(MM)
1999 260 127 194 102.2
2000E 318 130 200 127
2001E 354 144 228 139
2002E 389 163 247 156

TEV/EBITDA
1999 11.8 9.9 8.2 9.9
2000E 9.7 9.7 7.9 7.9
2001E 8.7 8.7 7.0 7.3
2002E 7.9 7.8 6.4 6.4

EBITDA multiple sensitivity to 1 pt. Multiple change
$3.55 $3.92 $4.14 $4.98
as % of stock price 12% 12% 15% 14%

Full Year 2000 EBITDA
Net Income 131.0 58.9 65.4 55.2
Taxes 70.6 34.5 39.3 35.3
Tax Rate 35.0% 36.9% 37.5% 39.0%
Interest expense (income)
16.0 8.0 24.4 3.5
D&A 100.0 29.1 71.0 33.3
EBITDA 317.6 130.4 200.2 127.3

Full Year 2001 EBITDA Estimate
Net Income 151.2 66.1 76.2 62.0
Taxes 81.4 38.8 47.3 39.6
Tax Rate 35.0% 37.0% 38.3% 39.0%
Interest expense (income)
16.0 8.1 24.1 2.5
D&A 105.0 31.5 80.1 34.7
EBITDA 353.6 144.5 227.7 138.8

Full Year 2002 EBITDA Estimate
Net Income 174.2 77.5 88.2 72.6
Taxes 93.8 45.5 54.7 46.4
Tax Rate 35.0% 37.0% 38.3% 39.0%
Interest expense (income)
16.0 8.1 24.1 2.5
D&A 105.0 31.5 80.1 34.7
EBITDA 389.0 162.6 247.2 156.2


Free Cash Flow Analysis
2001 Net Income 151.2 66.1 76.2 62.0
D&A 105.0 31.5 80.1 34.7
Cap Ex 165.4 55.0 138.0 92.2
Free Cash Flow
90.8 42.5 18.2 4.5



FCF/share $0.91 $1.15 $0.33 $0.16
Price/FCF 31.2 28.1 80.6 218.9
FCF/Market Cap 3.2% 3.6% 1.2% 0.5%



III. FINANCIAL AND OPERATING STATISTICS
Leverage:
Total Debt/Total Assets
17% 19% 10% 14%
Net Debt/Total Cap (at market value)
7.7% 5.2% 7.2% 3.1%
Net Debt/2000E EBITDA 0.7 0.5 0.6 0.2
2000 EBITDA/interest expense
19.8 16.4 8.2 36.4
Current ratio 0.57 0.55 0.79 0.86
Profitability LTM
Gross margin 69% 53% 65% 50%
SG&A % 4% 37% 43% 14%
EBITDA margin 13% 21% 8% 26%
EBIT margin 9% 16% 5% 19%
Pretax margin 9% 14% 4% 19%
Tax rate 34% 37% 42% 39%
Net Margin 6% 9% 3% 11%
ROA 11% 14% 4% 16%
ROE 18% 24% 6% 21%

Catalyst

The catalyst is simply for these two companies historic multiples is be once again reflected in their stock prices or at least for the gap to narrow. This can happen from either CEC being recognized for their problems being over or by APPB's trouble growing the topline being uncovered.
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    Description

    This is a two-part trade that involves going long CEC Entertainment (CEC) and short Applebee’s (APPB) dollar for dollar. Chuck E. Cheese is a restaurant/entertainment destination geared for kids that has been around for over 20 years. Typical foods such as pizza, salad, sandwiches, and desserts are served. The main draw, however, is the extensive children’s entertainment options such as games, rides, and music/comic shows. There are currently 394 units (52 franchised) with the potential and plan to expand at a rate of 10% a year for the foreseeable future. CEC has had its share of problems this year and has been punished for them. They lowered F2001 earnings guidance from $2.56 to $2.50 on May 31st and reduced ’01 estimates even further to $2.22. On the first pre-announcement the stock dropped 20% and after recovering some of its losses, it dropped another 27% following the second reduction. But the earnings problem has been worked out of the stock and it trades close to its historic lows of next twelve months P/E and TEV/EBITDA. With analyst’s predictions of 20% earnings growth through unit expansion, SSS increases, cost reduction, and share buybacks; the stock has a PEG ratio of only .8. Management’s implementation of its phase 3 remodeling has been driving their SSS growth and further benefits are expected. These remodeling have included new games, rides, faster ticket counters, and menu improvements. While the results have been exciting, the costs have been fairly minimal by simply switching out different restaurants game machines rather than buying brand new ones for all units.
    The second part of this trade is to be short APPB. Applebee’s has been a turnaround story this year and its shares have risen from the mid teens last summer to its current level of around $32-33. The turnaround has already occurred and the upside opportunity has virtually vanished. While the street still touts this company as a 15-20% earnings grower, the ability for earnings to be grown as this pace is questionable and the quality of those earnings are suspect. By over serving their financials a little bit closer for the past several quarters, you can see that this EPS growth is not coming from the top line. The company has been buying large blocks of their shares back, which have been accretive to EPS. While this can be a positive use of cash flow, a high multiple should not be paid for this type of growth. However, APPB biggest problems will be in its ability to grow more restaurants. There are currently close to 1400 restaurants throughout the country making it the largest casual dining chain in the world. With close to twice as many restaurants as Chili’s (EAT), APPB will be hard pressed to find new markets to enter. Once investors begin to focus on APPB future trouble in expanding EPS, the company will cease to trade at premiums to the better casual dining operators.
    An opportunity like this is very appropriate for the type of environment that we are currently seeing. Without knowing the direction that the market will go in the short term due to earnings problems, layoffs, consumer confidence, or terrorism; it is much less risky to take a market neutral approach. Buying shares of CEC and shorting APPB alleviates most of this risk. A narrowing of the earnings and EBITDA multiples that these two companies trade at will result in a nice return on investment.



    Symbol EAT APPB CBRL CEC

    Stock Price $28.45 $32.50 $26.72 $35.00
    52 week High 31.30 33.91 26.85 55.50
    52 week Low 21.30 18.00 15.69 30.31
    % off high -9% -4% 0% -37%
    % off low 34% 81% 70% 15%

    Shares Outstanding 100 37 55 28
    Market Capitalization 2,831 1,197 1,470 976
    Float 97 25 53 21
    Short Interest 3.62 3.40 1.29 0.98
    Short/Float 3.72% 13.69% 2.43% 4.61%
    Avg. Daily volume (in 000s) 817 521 515 274
    Avg. Daily volume $$ 23,254.7 16,944.8 13,774.1 9,598.1
    SI/Avg. Daily Volume 4.4 6.5 2.5 3.6

    Dividend 0.00 0.00 0.00 0.00
    Yield 0% 0% 0% 0%

    Book Value 9.05 8.26 15.38 11.94
    Price/Book 3.1 3.9 1.7 2.9
    Tangible Book Value
    Price/Tangible Book

    Total Restaurants 944 1286 512 390
    Company Restaurants 693 285 512 336
    Franchise Restaurants 251 1001 0 54
    Company % of Total 73% 22% 100% 86%
    Franchise % of Total 27% 78% 0% 14%

    June Dec July Dec
    Fiscal Year 06/2001 12/2000 07/2001 12/2000

    I. P/E VALUATION
    Earnings Per Share (CY)
    1998 $0.69 $1.11 $1.65 $1.21
    1999 0.99 1.33 1.14 1.58
    2000 1.32 1.60 1.19 1.98
    2001E 1.52 1.79 1.38 2.22
    2002E 1.75 2.10 1.60 2.60
    next 12 mos 1.67 2.01 1.57 2.51
    Price/Earnings
    1999 28.7 24.4 23.5 22.2
    2000 21.6 20.3 22.5 17.7
    2001E 18.7 18.1 19.3 15.7
    2002E 16.3 15.4 16.7 13.4
    next 12 mos 17.0 16.2 17.0 14.0


    Cash EPS 1.75 2.10 1.66 2.60

    Price/Cash EPS 2002E 16.3 15.4 16.1 13.4

    Earnings Growth
    1999 to 2000 33.0% 20.0% 4.4% 25.3%
    2000 to 2001 15.4% 12.1% 16.4% 12.2%
    2001 to 2002 15.2% 17.3% 15.8% 17.2%
    1999-2002 average 20.9% 16.4% 12.1% 18.1%
    2001 PE/Growth Rate 0.9 1.1 1.6 0.9
    FC LT growth rate 16.25% 15.00% 13.20% 20.75%
    2001 PE/IBES LT Growth Rate 1.2 1.2 1.5 0.8


    Quarterly Earnings: Calendar year actual
    1998a 1Q 0.16 0.26 0.39 0.42
    1998a 2Q 0.23 0.29 0.56 0.26
    1998a 3Q 0.13 0.30 0.42 0.31
    1998a 4Q 0.17 0.26 0.28 0.22

    1999a 1Q 0.20 0.29 0.25 0.52
    1999a 2Q 0.31 0.34 0.21 0.34
    1999a 3Q 0.27 0.35 0.25 0.44
    1999a 4Q 0.25 0.35 0.20 0.29

    2000a 1Q 0.29 0.37 0.25 0.68
    2000a 2Q 0.36 0.41 0.42 0.44
    2000a 3Q 0.35 0.40 0.30 0.55
    2000a 4Q 0.32 0.42 0.26 0.33

    2001E 1Q 0.34 0.45 0.26 0.88
    2001E 2Q 0.42 0.47 0.48 0.43
    2001E 3Q 0.39 0.44 0.35 0.57
    2001E 4Q 0.35 0.44 0.31 0.35

    Quarterly Earnings Growth
    1999 - 2000 1Q 43.3% 25.0% 0.0% 30.8%
    1999 - 2000 2Q 17.4% 21.6% 100.0% 29.4%
    1999 - 2000 3Q 31.2% 13.2% 20.0% 25.0%
    1999 - 2000 4Q 26.3% 21.2% 30.0% 13.8%

    2000 - 2001 1Q 18.6% 22.7% 4.0% 29.4%
    2000 - 2001 2Q 16.7% 13.7% 14.3% -2.3%
    2000 - 2001 3Q 11.4% 10.0% 16.7% 3.6%
    2000 - 2001 4Q 8.0% 3.7% 19.9% 5.4%

    Change in Current Qtr Estimate (%)
    One Week -0.2% 0.1% 1.2% -0.4%
    One Month -2.1% -0.4% 1.2% 0.6%
    Three Months -3.8% -6.8% 1.3% -4.7%
    Change in FY 2001 Estimate (%)
    One Week 0.1% 0.0% 0.7% -0.2%
    One Month 0.7% 0.0% 0.8% -0.1%
    Three Months -0.5% -2.6% 2.5% -2.2%
    Change in FY 2002 Estimate (%)
    One Week -0.1% -0.1% 2.4% -0.3%
    One Month 0.2% -0.1% 2.4% -0.4%
    Three Months 0.2% -1.3% 14.3% -3.7%

    Quarterly Revenues
    1998a 1Q 401 147 317 105
    1998a 2Q 423 166 365 89
    1998a 3Q 432 169 351 98
    1998a 4Q 444 166 368 87

    1999a 1Q 459 179 386 118
    1999a 2Q 535 164 427 105
    1999a 3Q 511 164 423 116
    1999a 4Q 521 163 443 102

    2000a 1Q 551 165 436 141
    2000a 2Q 577 169 471 119
    2000a 3Q 589 172 467 130
    2000a 4Q 583 184 484 115

    2001a 1Q 626 182 468 163
    2001a 2Q 675 186 544 127
    2001e 3Q 685 188 #N/A 128
    2001e 4Q 688 197 #N/A 183
    Analysts 3 3 0 2

    Quarterly Revenue Growth: Year over Year
    1998 - 1999 1Q 15% 22% 21% 13%
    1998 - 1999 2Q 27% -1% 17% 18%
    1998 - 1999 3Q 18% -3% 20% 18%
    1998 - 1999 4Q 17% -2% 20% 17%
    1999 - 2000 1Q 20% -8% 13% 19%
    1999 - 2000 2Q 8% 3% 10% 13%
    1999 - 2000 3Q 15% 5% 11% 13%
    1999 - 2000 4Q 12% 13% 9% 13%
    2000 - 2001 1Q 14% 10% 7% 15%
    2000 - 2001 2Q 17% 10% 16% 7%

    II. ENTERPRISE VALUATION
    Current Current Current Current
    Cash/ST Investments 13.31 14.68 11.81 13.23
    ST Debt 17.64 0.82 0.20 0.12
    LT Debt 231.03 79.12 125.00 44.22
    Preferred/Other 0.00 0.00 0.00 0.00
    Net Debt 235.4 65.3 113.4 31.1
    Market Cap 2,831.0 1,197.0 1,470.3 975.8
    Total Ent. Value 3,066.4 1,262.3 1,583.7 1,006.9

    EBITDA(MM)
    1999 260 127 194 102.2
    2000E 318 130 200 127
    2001E 354 144 228 139
    2002E 389 163 247 156

    TEV/EBITDA
    1999 11.8 9.9 8.2 9.9
    2000E 9.7 9.7 7.9 7.9
    2001E 8.7 8.7 7.0 7.3
    2002E 7.9 7.8 6.4 6.4

    EBITDA multiple sensitivity to 1 pt. Multiple change
    $3.55 $3.92 $4.14 $4.98
    as % of stock price 12% 12% 15% 14%

    Full Year 2000 EBITDA
    Net Income 131.0 58.9 65.4 55.2
    Taxes 70.6 34.5 39.3 35.3
    Tax Rate 35.0% 36.9% 37.5% 39.0%
    Interest expense (income)
    16.0 8.0 24.4 3.5
    D&A 100.0 29.1 71.0 33.3
    EBITDA 317.6 130.4 200.2 127.3

    Full Year 2001 EBITDA Estimate
    Net Income 151.2 66.1 76.2 62.0
    Taxes 81.4 38.8 47.3 39.6
    Tax Rate 35.0% 37.0% 38.3% 39.0%
    Interest expense (income)
    16.0 8.1 24.1 2.5
    D&A 105.0 31.5 80.1 34.7
    EBITDA 353.6 144.5 227.7 138.8

    Full Year 2002 EBITDA Estimate
    Net Income 174.2 77.5 88.2 72.6
    Taxes 93.8 45.5 54.7 46.4
    Tax Rate 35.0% 37.0% 38.3% 39.0%
    Interest expense (income)
    16.0 8.1 24.1 2.5
    D&A 105.0 31.5 80.1 34.7
    EBITDA 389.0 162.6 247.2 156.2


    Free Cash Flow Analysis
    2001 Net Income 151.2 66.1 76.2 62.0
    D&A 105.0 31.5 80.1 34.7
    Cap Ex 165.4 55.0 138.0 92.2
    Free Cash Flow
    90.8 42.5 18.2 4.5



    FCF/share $0.91 $1.15 $0.33 $0.16
    Price/FCF 31.2 28.1 80.6 218.9
    FCF/Market Cap 3.2% 3.6% 1.2% 0.5%



    III. FINANCIAL AND OPERATING STATISTICS
    Leverage:
    Total Debt/Total Assets
    17% 19% 10% 14%
    Net Debt/Total Cap (at market value)
    7.7% 5.2% 7.2% 3.1%
    Net Debt/2000E EBITDA 0.7 0.5 0.6 0.2
    2000 EBITDA/interest expense
    19.8 16.4 8.2 36.4
    Current ratio 0.57 0.55 0.79 0.86
    Profitability LTM
    Gross margin 69% 53% 65% 50%
    SG&A % 4% 37% 43% 14%
    EBITDA margin 13% 21% 8% 26%
    EBIT margin 9% 16% 5% 19%
    Pretax margin 9% 14% 4% 19%
    Tax rate 34% 37% 42% 39%
    Net Margin 6% 9% 3% 11%
    ROA 11% 14% 4% 16%
    ROE 18% 24% 6% 21%

    Catalyst

    The catalyst is simply for these two companies historic multiples is be once again reflected in their stock prices or at least for the gap to narrow. This can happen from either CEC being recognized for their problems being over or by APPB's trouble growing the topline being uncovered.

    Messages


    Subjectcec vs appb
    Entry11/26/2001 11:28 PM
    Memberrosebud408
    I think this is a good idea but why not short YUM against CEC? YUM has much worse growth prospects than APPB and has a similar multiple?

    SubjectCEC vs. YUM
    Entry11/27/2001 08:35 AM
    Memberallen688
    Good question, but there are several reasons why I would prefer the APPB short over YUM. One reason is simply trying to match up similar companies when doing a pair trade. Clearly CEC and APPB have their differences including commodity exposure and customer base. However YUM is a much larger company (9+ billion TEV) than either of the other two and it has large exposure to international markets. A second reason is simply by virtue of its size and liquidity it commands a slightly higher multiple. This is also the case with MCD. Third, this company is viewed as as a turnaround with depressed, but improving earnings. KFC and Taco Bell are finally seeing improvements are several bad years. Thus the higher P/E multiple reflects the belief in this improvement in E. Finally I don't know if its fair to say that APPB growth prospects are that much greater than YUM. Their restaurants are pretty saturated in the US, but they see great potential for international expansion. I also just don't see how or where APPB plans to expand. They already occupy most of the good small markets and I doubt urban areas would accept them into the marketplace. I obviously disagree, but I do appreciate comments.

    SubjectI gave this a '2'
    Entry11/30/2001 08:03 AM
    MemberSpocksBrainX
    You don't short a company with a gigantic annuity-like franchise income stream trading at 13x cash flow in a world of 5% interest rates when comps continue to come in positive, energy costs are going to be lower, and other expense categories appear to be trending downward right now. Also, CEC's unit growth is only 10%. So if you want to fault APPB for tepid top line growth it is nonsensical to recommend CEC.

    In short, I think you did a particularly awful job of researching BOTH of these ideas.


    Subjectwow, pretty hostile
    Entry11/30/2001 09:31 AM
    Memberallen688
    It seems a little absurd to call a revenue stream from restaurants "annuity like". The environment is everchanging and I hope you never count on a stream of payments from a restaurant to pay the bills when these things constantly turn over. While I am not saying this company is the next Planet Hollywood, the stock has gotton way ahead of itself. If the franchise restaurant business is so great, why do most of the other companies shy away from it? I am just a little curious why someone would pay close to 17x next twelve months earnings for an annuity as you call it. And on CEC's growth potential, I think 20% EPS growth is pretty attractive. 10% unit growth is substantial and will facilitate the growth in EPS. Imagine, if APPB units grew at a 10% rate for 10 years, there would be more of them than Starbucks now (in the US). I think it is fair to say that Starbucks coffee is a bit more attractive on a frequency of use basis than APPB's "honey of a deal" program. In an industry that sees as many firms fold as this one, I would personally rather be long the one with a brand and identity as strong as Chuck E. Cheese rather than one whose only restaurant that I ate at closed within 6 months of opening b/c it was so unpopular. I'm sorry that you do not like the idea, but I would almost be willing to guarantee than APPB will not be trading at a premium or line with companies such as EAT, DRI, and CEC. These are superior companies with proven track records that don't include debacles like Rio Bravo.

    SubjectResponse
    Entry11/30/2001 10:08 AM
    MemberSpocksBrainX
    I am only hostile to ideas that I think are shoddily researched. If I feel like that I would assume that you would want to know why. Even these comments are downright peculiar – have you ever looked closely at APPB’s financials? CEC went through its own bankruptcy for pete’s sake, and the deferred tax asset enabled them to expand far faster than they would have done otherwise. Restaurants DREAM of franchising – all the truly successful chains do so because they can’t support the capital requirements of a restaurant build-out otherwise unless they turn to debt or endless secondary offerings. But do you even realize how HUGE that franchise income really is? Try this since 1991: 10041-15097-21324-31419-43739-54141-63647-66722-72830-84738. Do you realize that APPB has the highest margins in the restaurant industry precisely because of this income? Yet you apparently see this as a deficiency? Weird.

    It is true enough that APPB veers ever closer to saturation and must therefore start the process anew of developing a secondary growth vehicle. That might not be enough to be long on the stock but being short? That’s flat out dangerous. You don’t pick one of the best operators in the business to short unless the price is outlandish. This isn’t.

    SubjectBut if it matters
    Entry11/30/2001 10:12 AM
    MemberSpocksBrainX
    Just because I am hostile to the idea doesn't mean:

    1) other will be
    2) you won't make money
    3) my opinion means a hill of beans.

    That said, I don't understand your rationale here one iota and figured I'd say why. But perhaps it was done too harshly and I didn't mean to offend, but I honestly don't understand this one at all!

    Subject1) I am not sure why you say
    Entry11/30/2001 05:05 PM
    Memberallen688
    1)
    I am not sure why you say that restaurant companies DREAM of franchising and all of the successfull ones use the same model as APPB. This may be true for the quick service guys, but it is simply not the case in casual dining. I will break it down for you:

    % of Company Owned Restaurants
    EAT 73%
    RI 69%
    CBRL 100%
    DRI 97%
    OSI 78%
    CAKE 100%
    PFCB 100%
    CPKI 100%
    BUCA 100%
    APPB 22%

    I think these stats show that the franchise goal is not the dream of restaurant companies and for good reason. A company risks hurting its brand by over franchising and losing control of the name. There are plenty of people wanting to open Chili's, Olive Gardens and P.F. Chang's, but the companies don't allow it unless they are comfortable with how they will be run. This is a problem for APPB.

    2)
    It's true that APPB's margins are higher than many of its competitors, but CEC is not one of them. Again, for your benefit I will show you the margin breakout for these two.

    APPB
    Gross margin 53%
    SG&A % 37%
    EBITDA margin 21%
    EBIT margin 16%
    Pretax margin 14%
    Tax rate 37%
    Net Margin 9%
    ROA 14%
    ROE 24%


    Gross margin 50%
    SG&A % 14%
    EBITDA margin 26%
    EBIT margin 19%
    Pretax margin 19%
    Tax rate 39%
    Net Margin 11%
    ROA 16%
    ROE 21%

    3) I also read your review ahile back. At the time APPB was trading at a large discount to its peers. When the stock appreciated and much of the discount eroding away, you suggested selling the position. Now that it has continued to run up to a point that it trades at a premium, you think its attractive again? Doesn't make since to me.

    4) You must understand the nature of this trade. It is not about shorting APPB b/c I think its going to be the next ENE. The position and belief is that the respective trading multiples of these two companies will contract. The group can go in either direction as long as the discount that CEC is currently trading at comes in. The opposite trade (long APPB, short CEC) would have worked a year ago, and this way will work now.



    SubjectResponse
    Entry11/30/2001 07:36 PM
    MemberSpocksBrainX
    Each of those non-franchisers you've listed has gone out to the market with hot little hands and said 'gimmie, gimmie, gimmie' in a repeated basis. So far, it has worked for a few of them, but eventually the day seems to come when the market says 'no no no'. That's just my observation and experience with this industry.

    My comment to sell APPB in the earlier string of notes was foolish. However, I didn't suggest being long in APPB right here, I simply said that shorting it - a LONG way away from being long - was a dangerous thing to do. You didn't address my other margin comments either.

    Again, I don't like your idea, that's all. I am long CEC fwiw, and I own a bit position in APPB. There was no reason for me to get 'excited' in my reponse to you but that was my immediate first reaction.

    Subjectresponse
    Entry12/03/2001 06:40 PM
    Memberallen688
    I did answer your margin question. While APPB has higher margins than many of the casual diners, they are below CEC. Both CEC's EBITDA margin and Net Margin are higher than APPB.
    Your point about issuing more shares in the market may be true in regards to the new growth concepts, but that is not the case with the established companies. Darden and Brinker are not exactly fly by night companies. My point is that its absurd to assume all the casual diners want to be franchisers like APPB, but they lack the ability. These companies reiterate all the time that they have no intention or desire to switch to this type of model.

    Subjectmargins
    Entry12/04/2001 10:43 AM
    MemberSpocksBrainX
    I wasn't making a margin comparison between the two companies - again, I don't understand paired trades (and I guard my ignorance), all I understand is you said to be long CEC, short APPB. I view that as two different trades that should both work.

    If you are short APPB you have to consider that various cost pressures for APPB's business are relatively positive right now. Thus, APPB could get a margin upside in the next few quarters. This means that income growth is likely to outperform the top line. Add a lower share count and I come to the same conclusion here - I don't understand why somebody would want to short APPB at this time.

    But then again, I never short anything.

    On the other issue we can agree to disagree.

    Subjectmutiple contraction
    Entry12/07/2001 10:22 AM
    Memberallen688
    seeing that the p/e multiple difference has come in by 2 points for these two companies in less than 2 weeks, this would be a good point to take some profits for a 11% return.

    SubjectBy the way allen
    Entry12/11/2001 06:55 PM
    MemberSpocksBrainX
    great call on the CEC side - jury's out on APBB, but in hindsight this didn't deserve a "2". That implies problems with both sides of the trade and clearly I didn't have an issue with the buy end and understand - though don't agree - with the other side.

    Now maybe you can help me figure out what's wrong with PZZA's comps...

    SubjectGood exit point
    Entry01/17/2002 03:42 PM
    Memberallen688
    This trade is now up 27% since Nov. 26 and CEC is trading at a 10% premium to APPB based on 2002E EPS. While I believe APPB could resort back to the 13-14x EPS it has traded at in the past, this is an attractive exit point for the trade. Hopefully Paul, you have realized that the point of such a trade was to make money without taking on market risk during an extremely uncertain environment( and thus the APPB short was a hedge). Fortunately no other terrorist attacks occured, but you would have been protected if one had because both stocks would have dropped significantly.

    SubjectAll I know
    Entry04/13/2002 12:58 PM
    MemberSpocksBrainX
    Is you shared your idea and I got overly excited. Sorry about that. Fwiw, I still don't agree with the logic here, but the bottom line is this worked out for you and that's the only thing that counts.

    Fwiw, I just sold my last remaning CEC shares yesterday. Still own a small bit of APPB.

    Since you've followed this industry, any comments you care to make on my PZZA idea just written up would be appreciated.
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