Bojangles' Stock Leaves a Bad Taste Ahead of Earnings

NEW YORK (TheStreet) --  Bojangles  (BOJA) will announce its first quarterly earnings report as a public company Thursday after the closing bell. Investors aren't sure what to expect from the purveyor of Cajun chicken and biscuits so the best recipe is to be cautious because this is a stock that is down around 11% since the start of June.

The stock is down some 14% from since its initial public offering high of $28.45 so investors should stay cool. In a sector dominated by Yum! Brands' (YUM) KFC chicken chain and Popeyes Louisiana Kitchen (PLKI), the average analysts is no longer boasting about how dominant Bojangles can become. Reality has set in.

The Charlotte-based southern restaurant chain, which went public in May, has joined the ranks of restaurants like Shake Shack (SHAK) and El Pollo Loco (LOCO) looking to capitalize on the industry's recent momentum. For instance, shares of Shake Shack are up almost 70% since its initial public offering last December.

Not wanting to miss out on the next possible Chipotle Mexican Grill (CMG), however, investors have quickly bought into these "hot IPOs" and their aggressive growth plans. The promise of sustainable double-digit same-store sales growth is too much to pass up, investors fear. But not every menu can win -- not when these restaurants are fighting for the same locations, at the same time and from the same consumer.

The task is to decide which restaurant model will work.

Look at the recent struggles of LOCO stock, down 13% over the past year. The market is not always patient. In the case of Bojangles, it would seem the stock, which -- on its first day of trade -- sailed past its $19 IPO target to close at $23.81 (up 25%) has already flamed out.

Last Tuesday, BOJA stock declined roughly 5% after it post-IPO quiet period lifted. It didn't help that Wall Street analysts served downbeat opinions about its growth prospect, including Goldman Sachs, which initiated coverage at neutral while setting price target of $23. This implies a potential 8% decline in BOJA shares from Tuesday's close of $25.

Valuation continues to be the primary concern. At around $25 per share and a P/E of 35, against a P/E of 21 for the S&P 500, there is tons of implied profit growth in BOJA shares. But with plans to open some 25 company-owned restaurants in 2015 and another 32 franchise-owned restaurants, profits won't come quickly and costs are likely to increase.

In that vein, margins are likely to take a hit during these growth initiatives. With the stock's trailing and forward price to earnings ratio of 32 already presuming high profits, that implies more risk. So stay away unless the stock falls to around $20, where I think it's fairly valued based on forward estimates of 76 cents per share.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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