Let’s Chew on Chuy’s Holdings Inc (CHUY)

Both Chipotle and Panera have continuously rising AUVs. Chuy’s same store sales are weaker except in the most recent quarter when Chipotle comps dropped to 1% from 12.7%. Chuy’s track record of growth is short but can’t compare to the other big momentum names in restaurant stocks. In spite of this, it sells at valuations far in excess of the two best in class.

Good news

Chuy’s has a few positives that make it at least makes it a watch.  True, its growth, traffic, AUVs and comps are not in the same league with other great stories.  But it’s right up there when we look at cash-on-cash returns and returns on invested income (ROIC). Cash-on-cash measures restaurant cash flow against investment in the property and ROIC is a way to calculate returns on all invested capital.

Its ROIC trails Panera’s near-20% return the past few years and Chipotle’s string in the mid-20% range. Chuy’s comes in at a 12% ROIC that shows it is creating value in spite of falling AUV’s and low comps. The returns are 3% above their cost of capital and a positive spread is value creation. It’s small compared to its two better performing peers but positive.

Chuy’s also has a high cash-on-cash return on its restaurants. This is a measure of profitability. Anything above 30% is key for sustaining and growing the business. Chuy’s targets a 40% return on cash and claims to do more than that by a store’s second year of operation.

Chipotle has a 34% cash-on-cash return and Panera does 53% cash returns. Chuy’s plays with the big boys in cash-on-cash returns.

Foolish final word

The recent price at $38 along with the high PE ratio and EV/EBITDA make it overvalued when we consider its lower margins, declining AUVs, and comps. There are things it does exceptionally well like its creates value early in its growth cycle and it yields high cash returns on its restaurants.  If its comps, margins, and AUVs increase and its premium-priced multiples decrease, it may yet be a great investment.

The article Let’s Chew on Chuy’s (NASDAQ:CHUY) originally appeared on Fool.com and is written by jean graham.

jean graham has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill (NYSE:CMG) and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. jean is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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