Chuy’s Holdings, Inc. $CHUY
My Investment Checklist
1. Is the company undervalued?
EV/EBIT: 8.51 (This excludes operating leases)
Chuy’s is a tiny company, which offers investors massive growth potential. Notwithstanding, the business model is still unproven with only 96 locations and a fairly thin margin profile. Conversely Chuy’s has a sterling balance sheet and is returning meaningful capital back to shareholders. This coupled with a single digit earnings multiple, sets up for an incredibly compelling investment thesis!
2. Can I easily explain what the company does?
Yes, they’re a Tex-Mex restaurant chain. Chuy’s restaurants are all owner operated and management is unwilling (at the moment) to franchise out locations.
3. Does the cash flow statement line up with income statement?
Yes, cashflows have been consistently higher than reported earnings:
Almost all of their excess cash went towards share repurchases and capital expenditures. I have literally zero issues with these capital allocation decisions.
4. Is the Balance Sheet Healthy?
Total Cash: $89.7M
Total Debt: $41.6M
Current Ratio: 2.51
Please note I’m excluding operating leases from these numbers, which come in at $190.3M. Nevertheless, Chuy’s is sitting on a $48.1M net cash position and therefore have a fortress balance sheet!!!
5. How profitable is the business?
Gross Margins: 46.02%
Operating Margins: 10.66%
Net Margins: 7.1%
At first glance $CHUY looks like a pretty solid business, although the company is overearning due to Covid-19 choppiness. Here’s what they’ve averaged historically:
As you can see it would be unwise to forecast double digit margins out into the future. Nevertheless normalized margins aren’t too bad and being a young company, Chuy’s will probably discover operating efficiencies both in running and opening new restaurants. For these reasons I don’t think it would be unreasonable to forecast a 7% EBIT margin long term.
6. What is the company’s growth potential?
10-yr Revenue CAGR: 11.7%
10-yr Operating Income CAGR: 10.89%
Hot take alert: $CHUY has ten bagger potential! The company currently has 96 locations in 18 states and management thinks they can hit over 350 restaurants long term. That’s nearly a 4X on what I would consider to be a low-ball estimate. For example, there’s over 1,200 Chili’s and nearly 3,000 Chipotle’s currently in the US. Also before you pooh-pooh my comparison, please note that all three chains are priced competitively:
Furthermore Chuy’s offers a higher quality product and improved atmosphere, with patio seating and vibrant decorations at each location. Given the value proposition, I don’t understand why someone would patron a Chili’s over a Chuy’s all else being equal. In fact, it wouldn’t be crazy to assume full saturation around 1,000 restaurants. This of course would be a bull case, but no doubt attainable.
7. Is management rewarding shareholders?
Chuy’s does not offer a dividend however they repurchased $35.7M of shares last year and $19.7M in the last quarter alone. Moreover there’s $21.9M remaining on their current share repurchase program. Chuy’s also printed north of $30M in FCF the last two years and issues around $4M in stock based compensation. With margins expected to contract, I would assume roughly $25M returned back to shareholders in the next 12 months. That nets out to a ~6.5% total shareholder yield, which is out of this world for a company growing at double digits!
8. How does the company stack up against their peers?
Chuy’s most comparable competitor is Texas Roadhouse, Inc. $TXRH;
$TXRH EV/Sales: 1.4
Operating Margins: 8.38%
Texas Roadhouse seems reasonably priced, with an excellent balance sheet and a solid capital return policy. But Chuy’s is the guy she told you not to worry about. The valuation is almost 2X cheaper, $CHUY is returning more capital back to shareholders, and the growth prospects are miles apart. Sorry Texas Roadhouse but this wasn’t a fair fight, take your cinnamon butter and go shove it!!!
9. What’s the counter argument?
The counter argument is that Chuy’s is not a scalable business beyond the lone star state and more restaurant openings will destroy shareholder value.
There’s certainly reason to believe this argument, for one Texas has 39 of the 96 total locations. Moreover same store sales still haven’t got back to their 2019 levels. Nonetheless I’m quite dismissive of these arguments. Chuy’s isn’t an esoteric bubble tea franchise, they sell burritos and margs and that shit plays everywhere. In fairness the patio theme is likely not the best idea in cold weather climates. However $CHUY has an extremely long way to go before they come anywhere close to hitting saturation. Furthermore same stores sales were not an issue prior to Covid:
I’m of the mindset that Covid-19 is in the rearview mirror and these numbers will fully normalize in a year or so. Additionally the pandemic was a once in a 100 year event, which I’ll probably never seen again in my lifetime.
10. Is there something I think the market may be missing?
Part of the reason why $CHUY is selling at such a discount is because management is not providing guidance for 2022. They do have noteworthy headwinds including higher labor costs, increased commodity prices, and restaurant openings being delayed. Be that as it may, management stated they have price increases set in place for Q3. If the business had a demand issue, they probably would’ve eaten those costs instead of hiking prices.
Furthermore I’ve fully convinced myself that management is playing 3D chess with their share repurchases. The stock is objectively trading at a banana land valuation and $CHUY has plenty of dry powder. It doesn’t take a genius to figure out Mr. Market doesn’t like uncertainty and the stock price will react negatively as a result. $CHUY has posted a positive operating profit every year going back to 2008 and could buy back over 23% of shares outstanding with cash on hand if they wanted to. Reading in between the lines I would expect management to buyback all $21.9M remaining on their current share repurchase program shortly and reinstate a new buyback plan by October 2022.
My base case would be revenues growing at 11% per year for the next 5 years with a 7% operating margin at the end of year 5. I would also anticipate a 6% total net shareholder yield and a 15X EV/EBIT exit multiple. This works out to a ~22.5% expected return, which is too tasty to pass up. Additionally I would argue these assumptions are probably too conservative; I wouldn’t be surprised if topline grew faster, margins came in fatter, and Mr. Market decided to give $CHUY a 20X multiple. I do these writeups partially to keep myself honest and $CHUY offers a better risk adjusted return relative to a few names in my PA. Candidly Chuy’s smacks me across the face as a no brainer and for that reason I’ll likely start a position during my next buy cycle. Finally please do not outsource your due diligence to a stranger on the internet, as there’s a good chance I’ll be wrong.
***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours. This article is intended for educational purposes only and in no way should be interpreted as investment advice