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Let Them Eat CAKE

Is Cheesecake Factory worth considering despite weakness in the casual-dining industry? Investing Report: Amid weakness in the casual-dining industry, we are maintaining our BUY rating on Cheesecake Factory and raising our target price by $3 to $72, asserts John Staszak, an analyst with the leading independent research firm Argus Research.

Despite weakness in the casual-dining industry, Cheesecake Factory (CAKE) has now reported year-over-year increases in comparable-store sales for 29 consecutive quarters, with consistent growth in the low single digits.

Looking ahead, we expect CAKE stock to attract investors given the company’s record of dividend hikes, share repurchases and ability to open new stores while also generating consistent comp growth.

On May 3 after the close, Cheesecake Factory reported 1Q17 adjusted EPS of $0.72, up from $0.68 in the prior-year period and near the middle of management’s $0.71-$0.74 guidance range. For 2017, management now projects EPS of $2.93-$3.02, down from a prior $2.95-$3.07.

Cheesecake Factory plans to open up to 8 new restaurants this year. We think that Cheesecake Factory’s strong brand will continue to attract an affluent clientele.

Based on ongoing cost-cutting efforts and management’s guidance, our long-term earnings growth rate estimate is 15%. Over the long term, we also expect the company to exceed its goal of operating 200 Cheesecake Factory restaurants and 150 Grand Lux Cafes.

We believe that CAKE is undervalued at 20.6-times our revised 2017 EPS estimate, below the five-year average of 21.0. The PEG ratio of approximately 1.4, based on our estimates, is below the five-year average.

Our revised discounted cash flow model points to a value of $72, above current levels and consistent with a BUY rating. Our new target price of $72 implies a potential total return above 10% including the dividend.

John Staszak is an analyst specializing in restaurant, gaming and lodging groups with the leading independent research firm Argus Research.

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