Del Taco Restaurants (TACO) – Has It Hit Bottom?
The S&P 500 has surged from its low of 1881, not far from the 1867 low we saw a little over a month ago, or the 1862 low a little over a year ago. The index is only 14 points away from hitting the target price of 2089 we made on October 9. The index rose 22 points Friday, so the target could easily be hit in a day. 1st resistance matches the target price, while 2nd resistance is 2120.
Rising oil prices should be good for the market. The market seems to assume that the Fed will push its first interest rate hike till next year or at least till the global economy recovers more. Earning this past week has been very good. Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and McDonald’s (MCD) have all beat estimates by a wide margin. Apple (AAPL) is up Tuesday. The company has beaten expectations in each of the past four quarters, and we expect it to beat estimates again.
Restaurants have been hit hard by worries about a potential decrease in consumer spending and increasing costs from raising the minimum wage. Del Taco Restaurants (TACO, $12.76, up $0.03) has fallen close to its all-time low. Is it time to snatch up shares?
Founder Ed Hackbarth became a manager at Bell's Hot Dog, a California restaurant co-owned by Glen Bell, in 1954. The restaurant served hamburgers, hot dogs and Bell’s special chili dog sauce. Experiencing competition from McDonald's (MCD), Bell experimented by adding tacos to his menu. The tacos were a hit, and Bell changed the name of the business to Taco Tia. Bell would later found Taco Bell. In 1961, Hackbarth left Taco Tia to open his own fast food place.
On September 16, 1964, Hackbarth teamed up with real estate broker David Jameson to open a taco restaurant in Yermo, California named Casa del Taco, which translates from Spanish as “House of the Taco.” He later decided to shorten the name to Del Taco. Unlike his competitors, Hackbarth combined the area’s most popular fast foods, selling hamburgers, fries, shakes, and Mexican fare. Selling inexpensive cheeseburgers and tacos, the business started franchising stores, and had about 50 restaurants by 1977. However, it was still located almost exclusively to California. The menu was also expanded to include bun tacos, quesadillas, and ice cream sundaes.
In 1988, Anwar Soliman, chief executive of American Restaurant Group, bought Del Taco and merged it with the restaurants of another Mexican chain, Naugles, in an attempt to make the a national chain to challenge industry leader Taco Bell. Soliman upgraded the menu with more expensive and elaborate offerings. However, at that time, Taco Bell was lowering prices, and took customers from Del Taco/Naugles. In 1990, the chain was bought by a management group, headed by company President Wayne W. Armstrong, to restore it back to its roots. Armstrong lowered prices, served smaller portions, and returned it to being open 24 hours a day. The deal was estimated to be worth $100 million to $150 million. At the time, the company had 350 restaurants and estimated gross annual sales of $250 million. It had about 11% of the Mexican fast-food market.
In the early 1990s, the company tried to expand too quickly, and by 1995, it had to close unprofitable units and ended the year with only 300 restaurants. But by 1997, sales grew back to about $250 million. Forming an advertising deal with sports teams, the company grew average annual sales to $1 million per restaurant by 2003. In 2008, it opened its 500th restaurant, but was still in heavy debt.
On March 12, 2015, Levy Acquisition Corporation (LEVY) and Del Taco announced plans to merger under which Del Taco would become the sole subsidiary of LEVY over a two-phase transaction. LEVY was formed in October 2013.
- In the first phase of the merger, which was to be completed on March 20, 2015, the Levy family and a group of investors would purchase $120 million of Del Taco common stock. The funds would be used to repay $111.2 million of the $250 million of Del Taco’s high-interest debt.
- In the second phase of the merger, which was to be completed on June 30, 2015, Del Taco would repay an additional $68.6 million of senior debt. Thus, lowering Del Taco’s high-interest debt to $70.2 million. At the end of the merger, Del Taco would become a publicly traded stock on the NASDAQ Stock Exchange under the ticker TACO. Existing stock of LEVY would be transferred to shares of TACO.
Larry Levy, who controlled LEVY, became chairman of Del Taco. Levy believed that Del Taco could quadruple in size from its current 550 restaurants. This aggressive strategy could be possible since Levy co-founded Levy Restaurants and grew it from scratch into an international food service company that generates over $1 billion in revenue. He plans to accelerate Del Taco’s expansion in 2017.
On June 30, TACO stock opened for trading at price of $15.04 a share, and ended the day at $15.22 a share. The company’s same-store sales increased 7.7% in the first quarter ended March 24, while revenue increased 8.9%, to $94.4 million. This was the 9th straight quarter of same-store sales growth. Its $4.9 million loss in the quarter was due to a $6.3 million one-time charge.
Speculation is circling that the chain could become the next Chipotle Mexican Grill (CMG) or something similar. CMG went public on January 27, 2006 and is up 1,439.62% since then. Like CMG, TACO makes its food fresh, something Taco Bell does not do. We agree with the CEO that the company is not as high-end and expensive as Chipotle, but it is one step above Taco Bell in freshness. As noted above, TACO increased same-store sales by 7.7% in the first quarter ending March 24, while Chipotle posted an impressive 10.4% jump in same-store sales, and Taco Bell’s grew 6%.
The company’s menu includes hard shell tacos, soft tacos, burritos, handcrafted salads, deluxe taco salad, fresca bowls, quesadillas, nachos, double and triple del cheeseburgers, bacon double del cheeseburgers, crinkle cut French fries, chili cheddar fries, regular fries, shakes, and dinner burritos. The Buck and Under menu includes offers smaller portions of as little as 50 cents.
On October 19, the company released 3rd quarter earnings for the period ending September 8.
- Revenue for the quarter was $98.6 million, up 6.7% from a year ago.
- System-wide comparable restaurant sales growth was 5.6% and company-owned comparable restaurant sales growth was 5.4%, marking the 8th and 13th consecutive quarter of gains, respectively.
- Analysts raised 2015 EPS estimate from $0.45 to $0.46, while the 2016 EPS estimate was raised from $0.60 to $0.61.
- The company expects to open 13 restaurants system-wide this fiscal year. It expects to open 14 to 18 restaurants system-wide in fiscal year 2016.
Both total revenue and restaurant contribution (sales minus expenses) are expected to grow, which is good for the stock price.
While Taco Bell is part of Yum Brands (YUM), we will compare TACO to Chipotle (CMG) and El Pollo Loco (LOCO).
At $12.76, the stock is way below its low target of $18.50 made by 3 analysts recorded by Thomson/First Call. Median and high targets are $20, while the mean target is $19.50. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 1.3, unchanged from a week ago.
|Current Month||Last Month||Two Months Ago||Three Months Ago|