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CAKE Keybanc
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January 13, 2010 Morning Call Summary - Second Edition
Contents
Summary Of This Morning's Changes............................................................................................................................... 1
Relay......................................................................................................................................................................................3
Diamond Foods, Inc. (DMND) — Akshay S. Jagdale, Adam Josephson.........................................................................3
Diamond Foods (DMND-NASDAQ): Raising Price Target to $38 from $35.
Cheesecake Factory Incorporated (The) (CAKE) — Brad Ludington, John Dravenstott.............................................. 4
The Cheesecake Factory (CAKE-NASDAQ) pre-announced 4Q09 revenues of $401 million and SSS results of -0.9% that
exceeded our expectations and represented the fourth consecutive quarter of sequential SSS improvements for the
Company. We view these results as further evidence that CAKE's strategy of emphasizing value and quality through menu
innovation vs. discounts is the right decision for both today's environment and the long-term health of the Company.
Looking forward, we continue to expect CAKE to outperform many of its competitors in the coming quarters and beat both
expectations and company guidance. Accordingly, we reiterate our BUY rating on shares of CAKE.
KeyBanc Capital Markets Inc. Disclosures and Certifications........................................................................................ 5
Page 2
January 13, 2010 Morning Call Summary - Second Edition
Relay
We are raising our price target on BUY-rated Diamond Foods (DMND-NASDAQ) from $35 to $38 owing to our
belief that recent marketing spending will help its Emerald snack nut brand to continue growing apace. As we
have stated previously, we expect the Emerald brand to continue gaining market share for a number of reasons: Emerald
has competitive advantages in its singular focus on snack nuts, its ability to introduce new products more quickly than its
competitors, its packaging (which its largest competitor is unable to replicate) and its creative advertising. The most recent
evidence of DMND's success in growing this brand is that during the four-week period ended November 28, Emerald sales
in grocery stores gained 360 basis points of share to reach 10%, and in the 12-week period ended the same date,
Emerald's share grew 230 basis points to 8.2%. DMND is spending significant money to market both Emerald and its Pop
Secret brand (the latter of which it bought in September 2008 and assumed full control of in February 2009); the Company
recently launched a new Pop Secret marketing campaign that includes six national TV commercials, movie sponsorships
on cable networks and a website. It also sponsored the eighth annual Emerald Bowl, which was a sellout and which set
the highest rating in the bowl's history. Additionally, the Company will feature both brands in a commercial to be aired
during Super Bowl XLIV.
Our view remains that the Company can reach $3.50 in EPS without the benefit of acquisitions in five years, if not sooner
(from $1.47 in FY09), owing largely to Emerald. Our FY10 and FY11 EPS estimates remain $1.88 and $2.22, which
represent 28% and 18% growth, respectively. Our upwardly revised price target of $38 implies a 20x multiple on our FY10
estimate and a 17x multiple on our FY11 estimate; we believe these multiples are reasonable given DMND's growth
prospects (PEG ratio of 0.8x). We also believe DMND shares are significantly more attractive than the market as a whole.
DMND has historically traded at a 56% premium to the S&P 500 on a NTM P/E basis, but trades at just a 16% premium
today. We believe S&P 500 earnings are likely to grow at a much lower rate than DMND's in the years to come; the
former's growth is predicated on the economy as a whole growing, while the latter's is largely unrelated to the economy.
We believe DMND should trade at a larger premium to the S&P 500 than is currently the case.
Valuation
Attractively valued relative to its expected growth rate. At our revised price target of $38, the Company would trade at
a P/E multiple of 20x our FY10 estimate and 17x our FY11 estimate. DMND trades at 18.5x consensus NTM EPS
estimates, compared to its peer group average of 13.4x. We view DMND's valuation as attractive given our belief in the
Company's long-term growth prospects.
Risks
Risks that could impede the stock from reaching our price target include: tree nuts and other commodity prices
could increase more than anticipated, and the Company could be unable to pass on these costs to consumers; lack of
pricing power as a result of competitive pressures or economic headwinds could cause a deceleration in sales growth;
Wal-Mart represented 21% of net sales in FY09 and loss of this customer would severely negatively impact earnings; and
product recalls due to food safety and quality concerns could hurt sales or cause consumers to avoid the Company's
products.
Page 3
January 13, 2010 Morning Call Summary - Second Edition
CAKE released preliminary 4Q09 (ending December 29, 2009) revenues and SSS before the market open on Tuesday,
January 12, 2010. Full financial results will be released after the market close on February 11, 2010.
• Total Revenues Grew Slightly to $401 Million in 4Q09: Total sales in the 4Q edged up slightly to $401 million from
$400 million in 4Q08. This beat our estimate of $394 million by approximately $7 million. We believe the upside to our
projection came primarily from better-than-projected SSS in the quarter.
• Systemwide SSS Declined by 0.9%: This beat our projected decline of 1.9% by 100 basis points (bps). CAKE was
lapping a decline of 7.1% from the year-ago period. This is an impressive 190 bp sequential improvement from the 3Q09
SSS decline of 2.8% and also represents the fourth consecutive quarter of sequential SSS improvements for the
Company. CAKE was lapping a SSS decline of 7.1% from 4Q08. By brand, the Cheesecake Factory's SSS declined by
0.7%, representing a 170 bp sequential improvement from the 2.4% decline in 3Q09 and a 630 bp improvement from
the year-ago decline of 7.0%. The Grand Lux Café produced a 4Q09 SSS decline of 3.9%, which represents a 210 bp
sequential improvement from the 3Q09 decline of 6.0% and a 420 bp year-over-year improvement from the 4Q08
decline of 8.1%. We view these results as further evidence that CAKE's strategy of emphasizing value and quality
through menu innovation vs. discounts is the right decision for both today and the long-term health of the Company.
• Estimate Revisions: We are increasing our 2009 estimate to $1.02 from $1.00 to reflect our expectations of
increased leverage from the SSS upside in the 4Q. For 4Q09, we raised our estimate to $0.24 from $0.22. We are
also bumping up our 2010 estimate to $1.14 from $1.13, which remains above CAKE's guidance, and initiating a
2011 estimate of $1.28.
Valuation
CAKE is presently trading at 19.7x our revised 2010 estimate of $1.14 and 7.8x on a 2010 EV/EBITDA basis, compared to
the peer group average of 20.4x and 7.1x on comparable P/E and EV/EBITDA bases, respectively. On an EV/Sales basis,
CAKE is trading at 0.9x on both a TTM and forward-looking basis, as compared to a five-year TTM average of 1.7x
(including a trough of 0.3x and a peak of 2.9x) and a five-year forward-looking average of 1.5x (with a trough of 0.3x and a
peak of 2.6x).
Our $24 price target assumes a P/E multiple of 21.1x (compared to a five-year average of 24.0x) our 2010 estimate of
$1.14 and 18.8x our 2011 estimate of $1.28. After adjusting for our projection of $100 million of debt payments in 2010,
our $24 price target assumes that shares are trading at 7.8x and 7.3x on a 2010 and 2011 EV/EBITDA basis, respectively
(compared to a five-year average of 10.6x). It is also based on an EV/Sales multiple of just 0.9x on a 2010 basis and 0.8x
on a 2011 basis. We feel that the premium on an EV/EBITDA and P/E basis is warranted given CAKE's significant free
cash flow and potential for margin recovery once SSS and traffic levels stabilize.
Risks
Risks that could impede the stock from reaching our price target include commodity cost fluctuations, consumer spending
uncertainty, consumer acceptance of the brand and other risks detailed in the Company's SEC filings.
Page 4
January 13, 2010 Morning Call Summary - Second Edition
Coverage was transitioned to current research analyst Brad Ludington on 4/9/09. All prior rating and price target
activity indicated on this chart reflects the work of a previous research analyst.
During the past 12 months, Diamond Foods, Inc. has been a client of the firm or its affiliates for non-securities related
services.
We expect to receive or intend to seek compensation for investment banking services from Cheesecake Factory
Incorporated (The) within the next three months.
We expect to receive or intend to seek compensation for investment banking services from Diamond Foods, Inc. within
the next three months.
Rating and Price Target History for: Cheesecake Factory Incorporated (The) (CAKE) as of 01-12-2010
02/13/07 04/25/07 10/24/07 01/25/08 07/25/08 04/16/09 04/24/09 07/24/09
H:NA B:$32 B:$30 B:$25 H:NA B:$17 B:$21 B:$24
32
24
16
0
Q1 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
2008 2009 2010
Coverage was transitioned to current research analyst Brad Ludington on 4/9/09. All prior rating and price target activity indicated on
this chart reflects the work of a previous research analyst.
Created by BlueMatrix
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January 13, 2010 Morning Call Summary - Second Edition
Rating and Price Target History for: Diamond Foods, Inc. (DMND) as of 01-12-2010
04/30/09 09/29/09
I:B:$32 B:$35
40
32
24
16
8
Q1 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
2008 2009 2010
Created by BlueMatrix
Rating Disclosures
Distribution of Ratings/IB Services
KeyBanc Capital Markets
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY] 154 42.70 32 20.78
HOLD [HOLD] 201 55.70 51 25.37
SELL [UND] 6 1.70 1 16.67
Rating System
BUY - The security is expected to outperform the market over the next six to 12 months; investors should consider adding the security
to their holdings opportunistically, subject to their overall diversification requirements.
HOLD - The security is expected to perform in line with general market indices over the next six to 12 months; no buy or sell action is
recommended at this time.
UNDERWEIGHT - The security is expected to underperform the market over the next six to 12 months; investors should reduce their
holdings opportunistically.
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January 13, 2010 Morning Call Summary - Second Edition
The information contained in this report is based on sources considered to be reliable but is not represented to be
complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the date of
publication and are subject to change without notice. This report does not constitute an offer to sell or a solicitation of an
offer to buy any securities. Our company policy prohibits research analysts and members of their families from owning
securities of any company followed by that analyst, unless otherwise disclosed. Our officers, directors, shareholders and
other employees, and members of their families may have positions in these securities and may, as principal or agent,
buy and sell such securities before, after or concurrently with the publication of this report. In some instances, such
investments may be inconsistent with the opinions expressed herein. One or more of our employees, other than the
research analyst responsible for the preparation of this report, may be a member of the Board of Directors of any
company referred to in this report. The research analyst responsible for the preparation of this report is compensated,
based in part, on investment banking revenue which may include revenue derived from the Firm's performance of
investment banking services for companies referred to in this report, although such compensation is not based upon
specific investment banking services transactions for these or any other companies. In accordance with industry
practices, our analysts are prohibited from soliciting investment banking business for our Firm.
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