Chowing Down on Fogo de Chau

- By Holmes Osborne, CFA

Fogo de Chau (FOGO) is a Brazilian steakhouse that IPO'd a year and a half ago. The stock has done poorly with slow sales growth but is Consumer Reports' No. 1-ranked steak restaurant.

The stock trades at $11.35, there are 28.13 million shares, and the market cap is $319 million. According to Bloomberg, the trailing 12-month earnings per share are $1.15. The stock trades at a price-earnings (P/E) ratio of 9.9. Forward earnings estimates are 95.5 cents for 2017. The stock trades at a price-sales (P/S) ratio of 1.2 and return on equity of 12.5%.

Sales were $271 million in 2013, $262 million in 2014 and $219 million in 2015. Net income over that timeframe was a $937,000 loss, $17.6 million and $27.9 million. The balance sheet shows $27.5 million in cash and $9 million in accounts receivables. This is to $22.4 million in accounts payables and $157 million in debt. A little debt heavy for my taste. I come up with a free cash flow of $10.7 million over the last four quarters. This would be a free cash flow yield of 3.4%.

It has 31 restaurants in the U.S., 10 in Brazil and one joint venture in Mexico. The U.S. accounted for 85.3% of revenue in the most recent quarter and Brazil 14.7%. Of course, the weak South American economy has affected Fogo. In Brazil, sales were down $3.9 million (17.7%), of which $4.2 million was currency, offset by $300,000 in noncomparable sales (I have no idea what that means). Adjusted EBITDA was $29.9 million for the first six months.

Fogo was a division of private equity outfit Thomas Lee & Partners. The restaurant was spun off in 2015. It used proceeds of the IPO to pay down debt. Before that, it was part of holding company GP. One thing I found interesting about Fogo is that the company brings many of its chefs (churrasqueiros) to the U.S. The visa that allows this is called an L-1A. That's pretty neat.

What's neat about the experience is that these large chunks of meat are skewered right in the restaurant. The churrasqueiros then carve the meat right in front of the customer. What got me interested in Fogo is that it is the top-rated steakhouse in the U.S. according to Consumer Reports. Consumer Reports is pretty serious and doesn't play around.

This presentation at a Jefferies conference is worth a look. It appears that Fogo has much higher margins and free cash flows than many of its competitors. Why? As far as I can see, it appears that the chefs are also the waiters. This reduces costs. There are plans to open five or six more locations next year. Management has a goal of 18% to 20% earnings per share growth.

The knock on Fogo is that sales have been stagnant. No one is going to buy shares in a restaurant stock once sales have stalled. I must admit that I've never eaten at a Fogo. As the company has a large presence in Texas, it has been hurt by the slowdown in energy. Less oil guys eating out. We've already covered the Brazilian issues.

Thomas Lee Partners owns 79% of the stock. If it sells, it could put downward pressure.

The stock has gotten killed. A year and a half ago, it was over $26. Since then, it is close to its all-time low (although it's a new stock). The slowdown in sales concerns me, but high rating from Consumer Reports intrigues me.

Disclosure: We do not own shares.

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