The Real Story: At P.F. Chang's, It's Check Please!

P.F. Chang's China Bistro (PFCB) has been in The Real Story crosshairs since January, when I said the stock would fall below $39.

On Wednesday, the stock fell below that threshold, so I suggest shorts take their profits and move on. (The stock was trading at $39.76 recently today).

Let's assume the consensus is correct and P.F. Chang's will earn $1.32 a share this year. At $39, the stock is trading at 29.5 times earnings with a median long-term growth expectation of 22%. The stock's PEG ratio -- its price-to-earnings ratio divided by its growth rate -- of 1.3 isn't that expensive anymore. I question whether that growth rate is achievable, but again, we're going with the consensus.

Comparing P.F. Chang's with the broader restaurant industry shows that it's cheaper on some metrics but is underperforming the industry in some key areas as well. In other words, not a great buy or sell at this price, compared with its peers.

At the time that I first wrote about the company, analysts were split on the stock. Back then, there were 10 buy recommendations, 10 holds and one sell. Today, one buy and the sell have moved to holds, giving it an analyst scorecard of nine buys and 12 holds.

However, the shorts have become emboldened during the decline. There are currently 6.9 million shares short, or 28% of the float -- a huge number. That compares with 5.6 million shares short in the previous month and 4.9 million when my original story was published. It was a crowded short then but is even more so now. A good number or two when the company reports its second-quarter earnings on July 26, and the shorts may run for the hills.

I'm not saying the restaurant chain has seen the last of its troubles. Traffic growth is still a problem and the high cost of gasoline certainly won't help.

And the stock isn't exactly cheap at 29 times projected 2006 earnings -- an estimated earnings figure that has come down twice in the past two quarters. I still expect earnings to top out at $1.28.

P.F. Chang's Bistro hasn't seen a same-store sales figure north of 2% since April 2005. And the company's Pei Wei restaurants, which Wall Street had glommed onto as a huge growth story, have posted negative same-store sales figures for the first three months of the year.

Win Some, Lose Some
P.F. Chang's Restaurant Industry
Price/Earnings 29.5 22.8
PEG ratio 1.3 1.9
Price/Book 3.5 4.6
Price/Sales 1.3 1.6
Net Profit Margin 4.40% 6.20%
Return on Equity 13.10% 16.20%
Dividend Yield 0% 1.50%
Source: Bloomberg, Capital IQ, Hemscott Americas

Six months ago, few on the Street were talking about weak traffic and same-store sales. Now it appears that's all anyone is focused on. I'm not suggesting all the bad news is baked into the stock price, but it will be more difficult to surprise anyone with bad news, as sentiment is already so poor.

There could be some more downside to go if P.F. Chang's can't right itself. However, just as you shouldn't gorge yourself at the dinner table, neither should you on your stocks if you've had a plan. After this scrumptious meal, the fortune cookie says, "Achieved price target means time to move on."

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.

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