ATML Earnings Action

The Cheescake Factory Inc. (CAKE) got a sweet upgrade from SunTrust analyst Robinson Humphrey earlier yesterday who raised his rating on the restaurant stock to “buy” from “neutral” while setting an $11 price target. From news wire reports, he mentions that debt covenants have played a role in the steady share price decline, but believes the company can amend its credit facility. The company is on track to generate free cash flow after CapEx of between $75 to $80 million, so they do have a good shot of doing that. What’s not highlighted in the re-cap, however, is another positive catalyst which is the benefit from lower commodity costs that the company will see in the upcoming quarter. The October conference call stressed cost pressures that squeezed operating margins like many others in casual dining, with earnings being impacted by spikes in commodity and energy costs. Overall operating margin for the latest quarter was 5.2% versus 7.4% in the comparable quarter last year, with cost of sales as a percentage of revenue increasing to 25.7%. But unfavorable year-over-year commodity pricing from dairy products, poultry and general grocery items, for instance, has eased dramatically. That means that while estimates have been cut to $.85 for 2009 full year earnings, reflecting declines in restaurant traffic, the numbers fail to realize any potential upside to earnings because of lower commodity and energy costs. Despite an already decent move to the upside in the past few days, the stock still has room to run and investors should still have a sweet tooth for Cheescake because of the one-two punch catalysts of possible debt refinancing and continued lower commodity costs.