August 9, 2012

Will the CKE Restaurants shares be as popular as their hamburgers?

To analyze this company, we are going to use the same method used by the famous fund manager Peter Lynch. Using "Common Sense" can summarize the method. For example, if you like to buy Apple products, you should also take a look at the Apple stock. If you would like to learn more about the methods used by Peter Lynch, you can read this summary: Peter Lynch - Beat the stock market with what you already know, or invest in the excellent book One up on Wall Street written by Peter Lynch himself.

The Facebook stock ($FB) was the hottest IPO this year, and the performance of the Facebook stock after the IPO shows exactly why it is a good idea to avoid the hottest IPOs. The Facebook stock used to trade at $45, and is now hovering at around $20. One less hot IPO is that of the company CKE Restaurants ($CK), which will begin trading at August 10, 2012. The IPO has been postponed due to poor market conditions.

One of first Carl's Jr Restaurants. Source: CKE Restaurants

About the company CKE Restaurants
The story behind CKE Restaurants began 1941 in Los Angeles when Carl Karcher bought a hot dog cart. The business soon expanded, and the first restaurant, with the name Carl's Drive-In Barbeque, opened in 1945. After the Second World War, Americans began enjoying the sun in the southern parts of the country, and they also like the hamburgers sold by the new chain Carl's Jr Restaurants. The Carl's Jr Restaurants were actually the first quick-service restaurants where the customers paid for the food and received the food at the same time, a standard used today all over the world. CKE Restaurants acquired the restaurant chain Hardee´s in the 90's, and acquired the green burrito brand in 2002. Currently, the company is the #5 US fast-food chain, after Subway's, McDonald's, Burger King, and Wendy's. The company consists of two restaurant chains:
  • Carl's Jr Restaurants - selling burgers, salads, and green burritos. The restaurants are located in the US and at various locations over the world
  • Hardee´s - selling burgers, and red burritos. The restaurants are located in the US and in the Middle East

Do you like the product?
The first step when analyzing a company selling food is always to eat the food and see if you like it. Peter Lynch always loved that he could buy stocks in a company where he liked to eat the product. This may be a problem here, CKE Restaurants will soon open a Carl's Jr in Sweden, but you can't find one here today. So, the proper way to analyze the company if you can't test the product is to search the social media, and try to see what people are writing about the product. We are going to use Twitter here, just type in the company name in Twitter Search and go though the tweets.

I searched through a couple of hundred tweets, and the only somewhat negative tweets I found were about people complaining about why Carl's Jr restaurants are expensive.

Step 1. Find the growth of the company and put the company in the correct category
The growth here is defined as the growth in the amount of restaurants. From the image below, we can see that the growth in the amount of restaurants has not been that good. According to Peter Lynch, CKE Restaurants is probably a Slow Grower. They currently have 3263 restaurants in 26 countries.

Source: RetailSails

Step 2. Filling in the details
Peter Lynch has a list with the attributes of a great company to invest in, here are the attributes that fit CKE Restaurants.
  • The name of the company sounds boring. CKE Restaurants is a boring name, and that's a good thing
  • The institutions don't own it and the analysts don't follow it. CKE Restaurants is not yet a public company, so most analyst and institutions are probably still focusing on Facebook
  • People have to keep buying it. We saw above that people like the products and they keep returning to the restaurants

  • The customers like the food, but the company's numbers don't show that. The same-store sales has been negative the last 2 years, and the change in revenue has been negative the last 4 years (-0.5 percent to -6.2 percent). People complained on Twitter that it's expensive to eat at the restaurants, but the food is more tasty compared with less expensive restaurant chains like McDonald's. Since the economy is still in a bad shape, maybe people prefer the less expensive and less tasty burgers?  
  • Peter Lynch always liked to buy the fast growing companies (20-25 percent a year), and CKE Restaurants is not growing fast
  • The company says that they will expand with more restaurants, and will open more restaurants in Europe and at other locations. The company has only 3000 restaurants, while the competitor McDonald's has 33,000 restaurants

Source: RetailSails, Wikipedia, Renaissance Capital

Remember that this was only a short introduction to to the company to use if you haven't heard about the company before, and to get a feeling if you would like to learn more about the company on your own.