Thursday, Credit Suisse upgraded CKE Restaurants Inc. (CKR) shares to Outperform from Neutral and increased its price target to $12 from $11.
Analyst Siegner noted that a focus on decelerating 1-year comps has driven CKR to a 400bps P/E discount vs. the domestic QSRs, which we find unjustified given that 2-year comps are down only 1% and trending 120bps ahead of these peers.
The analyst upgraded the stock on the belief that continued stabilization in 2-year comps should refocus investors on absolute performance and therefore close the valuation gap. The analyst's fiscal 2010 EPS estimate remains at $0.89, while his fiscal 2011 EPS estimate increased to $1.00.
Many of the analyst's concerns about fundamentals are abating: the introduction of a premium burger at MCD allows CKR to market relative value/money in premium, other initiatives around LTOs, beverages, and affordable snack products can offer additional comp stability, and margins have been steady for 2 quarters despite deleverage-volatility here has been a challenge in the past.
The analyst said that the challenges of CA exposure, premium positioning in a recession, and the potential for month-to-month comp volatility still likely elicit a discount near-term, but he believes 100-200bps, not 400bps, is more reasonable.
The analyst added that P8 could show another month of stable 2-year trends at Carl's and will also include a full month of Monster energy drinks and three weeks of The Big Carl. The McHype campaign begins in P9. Good news in any of these could increase visibility into the comp outlook and start a run in the shares to the low double digits.
Currently, CKR is up $0.22 or 2.33% and trading at $9.67.
For comments and feedback: editorial@rttnews.com