Tuesday, December 20, 2005

The Sweet Taste of Expansion: CAKE

On Tuesday, Prudential initiated coverage on one of our top restaurant picks for 2006.

As we've opined many a time on this site, if you're going to do casual dining, at least do it the right way.

Like The Cheesecake Factory (CAKE), upscale purveyor of 50 varieties of cheesecake and other desserts, with an average check per guest of about $17.

Never been to a Cheesecake Factory before?

Be prepared to wait -- they operate at near capacity 24/7.

The niche chain is currently riding the same regional to national expansion wave that usually generates handsome returns (think Krispy Kreme before they cannibalized sales and mastered the art of creative accounting).

For the Cheesecake Factory to be the next Starbucks (SBUX), however, it's going to have to grow the only way it can -- new restaurant openings.

The ubiquitous coffee chain continues to expand and is currently pursuing growth opportunities in Asia.

CAKE's management expects to open 21 more US restaurants in 2006.

21 -- write it down -- that's the number we'll be watching closely next year.

Though shares are already up nicely in 2005, with strong management, brand visibility, and an enviable customer profile, the Cheesecake Factory's still atop our stock menu.

That's because 2005 will mark the first time that annual revenues at Cheesecake surpass the $1 billion dollar mark.

Let's hope the market wants another taste of Cheescake in 2006 -- at 35 X forward earnings, investors may soon be full.

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