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Fiesta Restaurant Investors Should Remain Patient, Says Raymond James

Fiesta Restaurant Group Inc FRGI shares plunged almost 10 percent after the company reported disappointing 1Q results.

Raymond James’ Brian M. Vaccaro downgraded the rating for Fiesta Restaurant from Strong Buy to Outperform, while reducing the price target from $45.00 to $37.50. The analyst mentioned, however, that the company’s comp and long-term growth visibility “should improve over the next several quarters.”

Disappointing Results

Fiesta Restaurant reported its 1Q16 EPS at $0.37, 3 cents below expectations. Although comps and store margins were lower, a part of the shortfall was offset by lower G&A. Total revenue came in at $176.7 million, representing 7.8 percent growth, with lower comps at PT [Pollo Tropical] and TC [Taco Cabana] being offset by higher volumes at units rolling into the comp base, analyst Brian Vaccaro said.

Management reiterated low-single-digit comp guidance, while marginally lowering its G&A and Pollo Tropical unit growth target. Vaccaro lowered the EPS estimate for 2016 by $0.08 to $1.44, reflecting lower comp and store margin assumptions, partially offset by lower G&A. The EPS estimate for 2017 has been reduced by $0.10 to $1.65, reflecting a smaller 2016 base and lower comp and unit growth.

Lower Near-Term Visibility, But Improvement Expected Longer-Term

“Comp visibility has deteriorated at both brands as 1) a significant advertising increase at Pollo Tropical has not resulted in a material acceleration in traffic and 2) Taco Cabana comps have turned negative in recent months (intense value/discounting plus soft macro trends in Texas),” the analyst wrote.

Although management projected an improvement in 2H comps on easier comps, new product and value news and increased advertising build, investors may adopt a “wait and see” approach, Vaccaro commented. He expressed optimism regarding PT’s long-term growth opportunity.

Following the pullback in shares, the stock’s valuation is now at a meaningful discount to growth peers. “While frustrating in the near-term, we would encourage investors to remain patient as comp and long-term growth visibility should improve over the next several quarters,” the analyst said.

May 2016Raymond JamesDowngradesStrong BuyOutperform
May 2016Sterne Agee CRTDowngradesBuyNeutral
Feb 2016JefferiesMaintainsBuy

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