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Del Taco: Boost From Buyback?

Summary

Del Taco continues to report solid growth, but the share price continues to fall.

Margins remain strong and a new buyback will help boost EPS growth.

I think TACO is going into the low to mid-teens as sentiment improves.

When Del Taco (NASDAQ:TACO) merged and went public last year, the company's shares were on fire. After the first trades in the $10 area, the stock eventually hit $17 before crashing back down to earth. When I first covered TACO back in August of last year, shares were still $16 and I called it an overpriced, also-ran chain. But after the stock made its lows in January of this year, I changed my sentiment and said TACO offered long-term value at $10. Unfortunately, shares have bounced around and, after the Q4 report, have continued a protracted downtrend to just $9. Is the long-term growth story deteriorating or is this a buying opportunity?

TACO's Q4 was actually stronger than expected as the company's comp came in at +5.8%. Unfortunately, the entire gain was due to check growth due to not only higher spending but menu pricing as well, as traffic came in slightly negative. I always look at traffic as the primary indicator of demand for a restaurant chain as it is far more sustainable than pricing gains, and TACO is on the wrong side. While the 10 bps loss in traffic isn't a big deal, the fact that it was negative at all is certainly not a good thing. I was hoping TACO would produce a positive traffic number in Q4 but that did not happen; traffic will be of the utmost importance in 2016. Pricing gains cannot last forever so eventually you need more people coming in the door; if that doesn't happen, the bull case for TACO...


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