In mid-February, RAVE reported second-quarter (2015) earnings that masked Rave Restaurant Group’s turnaround and kept Wall Street uninterested in RAVE stock. However, digging deeper into Rave Restaurant Group’s books and knowing its story have given me an opportunity to discover a gem the suit and ties would love to find yet continue to ignore.
Rave posted a quarterly loss of 4 cents per share on revenue of $11.1 million. The quarterly losses will likely continue for 2015, and there are only two more quarters left for the company’s fiscal year.
At the time of the release, most companies were reporting fourth-quarter numbers, but Rave is on a different calendar year due to the timing of its incorporation. This is important to remember because I expect Rave to turn a profit starting in fiscal year 2016.
I read the company’s 8-K quarterly report and found some good information concerning the number of shares outstanding along with its market capitalization.
Rave Restaurant Group is authorized to sell 26 million shares and currently has more than 9 million outstanding, as well as another 9 million potential dilutive shares. There are over 7 million additional shares in Rave’s treasury chest, and shares could come to market if it needed to raise capital.
Rave recently filed paperwork to sell additional shares to market, from time to time, and it could use the offerings to help fund its rapid growth, if needed. However, don’t expect Rave to “flood” the market with fresh stock, as it only “received” $1.7 million in stock proceeds last quarter.
Although Rave reported a loss for the quarter, the balance sheet is improving. Rave Restaurant Group has a little more than $2 million in cash (and equivalents) and another $2.7 million in accounts receivable.
My original enthusiasm for recommending RAVE shares at under $5 starting in 2012 was based on the rapid growth that would come from their Pie Five’s growth. Luckily, I visited my first location when Rave stock was below $8, but I hadn’t tried the pizza. I added additional shares to my portfolio while it was still in the single-digits after trying its pies at a nearby location in Richmond, Virginia.
While I may not be a whiz at analyzing a company’s balance sheet, I like buying stocks in products, foods or businesses I know, like and understand. Pizza can be a crowded field, but it’s the trend, quality, service and personal experience that separate the chains.
I have commented on Rave’s decision to revive its Pizza Inn locations and, while this was good news, it has weighed a little on the books. However, management was excited about the turnaround and is in the process of renovating and reviving the brand and food. These are “buffet style” locations, but they also have the ability to do delivery and carry-out. There are currently 252 Pizza Inn locations worldwide.
Pie Five is fast-casual, and Rave signed four more multi-franchise development agreements to bring another 72 Pie Five restaurants into its portfolio. This gets the “official” total to 329 restaurants on board, and the CEO plans to open 400 – 500 Pie Five’s during the next three to five years.
Rave expects to end fiscal year 2015 with 60 – 70 Pie Five locations, with 22 – 25 company-owned. This means that by the end of this June, Rave Restaurant Group will have 325 established Pizza Inn and Pie Five locations.
These numbers are important because I’m getting to a point.
RAVE Versus SHAK
While it is not a direct comparison, Shake Shack Inc‘s (NYSE:SHAK) initial public offering a few months ago has given traders a way to compare burgers to pizza. At the time, I mentioned that many on Wall Street were already commenting that Shake Shack was an “overpriced” stock with a high valuation on only 63 stores.
More importantly, Shake Shack said that it only planned to open 10 U.S. restaurants a year and probably not that many internationally. Shake Shack is striving to have 450 units but did not give a specific time frame for that expansion.
The current market capitalization for RAVE is roughly $152 million compared to $1.75 billion for SHAK.
While Rave’s Pizza Inn brand won’t grow as rapidly as the Pie Five name, these restaurants are already up and running and posted a 6.4% increase in domestic sales. Meanwhile, Pie Five sales increased 118%, and average weekly sales increased 31.6%, year-over-year. Overall, total revenue from both chains increased 11% year over year.
With more Pie Five locations coming on board and a renewed interest in capturing the pizza buffet experience, Rave is on its way to turning the corner. The market cap for Rave was under $70 million coming into 2015 and, while it has more than doubled, shares still have room to run.
Shares could trade up through the mid-teens over the near-term and could trade to $20 during the next 12 – 24 months. While this price target might seem aggressive, I would rather own shares of Rave than some of the recent restaurant IPOs. Rave is still an undiscovered and undervalued stock that has another 50% upside (at least) for those of you who might feel that it’s too late to get in.
There has been no new analyst coverage of RAVE since it changed its name from Pizza Inn. While there may have been some coverage of the stock when the ticker symbol was PZZI, Wall Street simply missed the stock’s run from $4 to a mid-March high of $16.20.
There have been two brokerage “downgrades” on the stock this month, however, and shares traded to a low of $13.67 last Thursday, followed by $13.68 on Friday. The downgrades have conveniently pushed RAVE stock near its 50-day moving averages. Where were these knuckleheads when shares were below $5 two years ago?
While I would like to think a “double-bottom” has formed, there is risk to $13.50 – $13 on a close below $13.65. A move back above $15 would suggest that the “dip” was bought, which is where I believe subscribers can feel comfortable adding new positions.
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