The Tastiest Spin-off of 2012

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Fast-casual is currently the fastest growing segment of the restaurant industry. As the trend continues to gain momentum, traditional fast food and sit-down restaurants are eager to jump on the fast-casual bandwagon. The fast-casual brands highlighted below are not as widely known as Panera Bread (NASDAQ: PNRA) and Chipotle Mexican Grill (NYSE: CMG), but they too have lengthy track records of success, and cultures that are rooted in quality.

Pollo Tropical is one of the most popular fast-casual restaurant concepts in Florida. Their fresh, never frozen chicken is grilled over an open flame to near fall-off-the bone perfection. When it comes to getting the best quality at the best price, hungry Floridians are voting with their dollars that Pollo Tropical is one of their favorite destinations.

The company has achieved twelve consecutive quarters of same store sales growth from their 120 restaurants (89 of which are company owned).

Taco Cabana delivers real Mexican food, prepared by real cooks in real kitchens. Whether the guest desires a sizzling fajita or a perfect salt-rimmed margarita, Taco Cabana prepares it by hand fresh and fast. That’s how they’ve done it, ever since their first patio café opened in 1978, now they have 158 locations.

Brand evolution is well underway— new restaurant concepts like the “under $5 menu” and “Happy Hours” appear to be gaining traction. During the recent Q3 conference call, Fiesta CEO Tim Taft highlighted that same store sales were up 6.4% in the month of October.

Recent Spin-Off

Carrols Restaurant Group (NASDAQ: TAST) previously owned all of the assets to Pollo Tropical and Taco Cabana. These two fresh and hip restaurant chains were hidden within the fatty buns of Carrols Restaurant Group; a holding company for 297 Burger King’s.

As of May 8, Pollo Tropical and Taco Cabana trade together as a new menu item– Fiesta Restaurant Group (NASDAQ: FRGI).

Where Are All The Analysts?

Fiesta is currently trading near $13.50, with a market value just over $300 million.

It appears that only one analyst is officially rating the stock, this means that Fiesta is relatively unknown to many investors— especially at the retail level.

An analyst over at Wells Fargo apparently smells the opportunity, taking valuable time from his day to ask a few questions on the recent Q3 conference call. Morgan Stanley didn’t bother to show up… but they own about $29 million worth of FRGI.

It’s likely that a few of these guys are beginning to pass this idea along to their best clients. A more formal rating of the stock will eventually happen; as analysts make their price predictions and recommendations known more publicly. Excited new buyers will follow their lead; albeit at higher prices.

Until then, shares of Fiesta will likely remain in a trading range or “accumulation phase”— the first phase of any large price movement; as the sophisticated players build their stake.

Bottom Line: if Fiesta is actually under the radar, the growing list of institutional investors would suggest they won’t remain there for much longer.

Pollo Tropical Has Plenty of Room To Expand Within Florida.

The flame-grilled chicken chain is only in its second or third inning… in terms of future expansion in Florida. Pollo Tropical’s roots date back to 1988, with their first location in Miami, and they have yet to saturate the market demand there! They continue to open profitable restaurants in Dade, Broward and Palm Beach Counties, core markets for the company. CEO Tim Taft has indicated that the company has an eye on expanding in Western Florida (Taco Cabana will be focusing on Texas).

Collectively, Fiesta plans to open 13 to 17 company owned locations in 2013, Pollo Tropical will represent 66% of the mix.

Operating Targets / Guidance For 2013:

a)   Same store sales growth of 5-6% at Pollo Tropical and 3-4% at Taco Cabana

b)   Capital Expenditures of $45-$50 million ($34 million for new restaurants)

c)   General Expenditures of $42-$46 million (management indicated this would be a baseline for going              forward)

d)   38-40% tax rate

A Few More Things You Should Know…

Fiesta has not adopted a formal “domestic franchising strategy.” CEO Tim Taft told investors that it is something management is working on, and it is “crystallizing” as the overall strategy evolves. A release of such a vision / plan would likely be a significant market-moving event.

In the past, Pollo Tropical has taken a $5.9 million write down for the closure of all five locations in New Jersey. These failures have caused some investors to be skeptical about Pollo Tropical’s ability to grow outside of Florida. With that said, it’s worth monitoring their two new locations in Atlanta.

Nashville, TN will be the next new home of what Fiesta considers to be one of their “high-profile sights.” This is a strategic focus for them as they attempt to position ​Pollo Tropical and Taco Cabana as general market brands.  

This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein.

Daniel T. Cook & Partners, LLC is registered with the State of Florida as a (RIA) Registered Investment Advisor. Custodial and clearing services are provided through Scottrade Advisor Services, Inc. member. SIPC

Daniel has purchased shares of FRGI on behalf of his client partners.

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