Rave Restaurant Group (RAVE) took a tumble in May after announcing its quarterly earnings results. Shares were pushing $15 ahead of the news, but they tumbled to a low of $10.72 earlier this month.
The quarterly losses could likely continue throughout 2015 and into 2016 before the company starts to see the fruits of its labor. However, revenues will explode once Rave’s “Pie Five” stores, which are currently being developed, start to mature. Therefore, I’m not too worried about the recent quarterly loss.
The company has more than $8 million in cash (and equivalents) and $3 million in accounts receivable. This means that it won’t have to borrow money to build its company-owned stores.
The Strategic Strength of RAVE Stock
Rave is on track to open 500 Pie Five restaurants over the next five years, and the company recently opened its 51st location. It will receive royalties from its strong partnerships and franchise agreements, which is what I want to expand on now.
The company’s CEO, Randy Gier, has a proven track record and has had successful stints at Frito Lay, KFC and Pizza Hut. He also has a talented team working with him, with Chris Smith, VP of operations, who helped Chipotle Mexican Grill (CMG) grow. Additionally, the company’s CFO, Tim Mullany, is a well-thought-of executive who worked in the same role for Smashburger.
Together, these three and the rest of the management team plan to dominate the fast-causal pizza industry. Pie Five cooks one of its pizzas in less than two minutes, and they taste really good. I know from experience, as I have tried a couple of different pizzas at its various locations.
While Pie Five will be its biggest breadwinner over the next decade, Rave also has nearly 300 “Pizza Inn” locations. These types of restaurants are pizza buffets that are being rebranded and upgraded. It is still too early to say if this “turnaround” project will work, and this is one of the drags that has weighed on earnings.
The beauty of Rave is hidden behind the reason the company changed its name from Pizza Inn Holdings. The company wants consumers to “rave” about its brand, and it’s not going to limit itself to just pizza. Down the road, I expect Rave to come up with another concept, but I can only speculate what it might be.
RAVE Stock Technicals
I mentioned coming into 2015 when shares were in the single-digits that once double-digits were cleared, RAVE stock might not look back. Following the journey to a 52-week high of $16.20, shares came close to testing single-digits, as they dropped to a recent low of $10.72.
The chart below shows the stock forming a floor of support at $11, with the 200-day moving average and $10.50 as a sub-floor. Shares have recovered their 50- and 100-day moving averages, with further resistance at $14. A move above this level could lead to a return into blue-sky territory and another run past $16.
I have talked about the lack of Wall Street coverage on this small-cap gem, but some of the suit-and-ties have finally taken notice. Roth Capital initiated coverage of the stock in April with a “buy” and matched my six- to 12-month target of $20 per share.
Last week, another brokerage firm issued a “buy” rating with an $18 price target.
Shares look very attractive at current levels. If my price target of $20 is reached, it would represent a gain of roughly 50% from where the stock is currently sitting. However, I believe this stock should be a multi-year hold, with tremendous price appreciation if the company can execute its aggressive growth plans.
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