Things I Liked From BJ's Restaurants, Inc.'s Latest Quarter

Source: BJ's Restaurants.

BJ's Restaurants is a casual dining and brewpub chain that currentlyconsists of 165restaurants in 21 states. The business focuses on providing affordable food options, including signature deep-dish pizza as well as award-winning company-crafted beers.

BJ's Restaurants has a footprint in less than half of the states and a market cap of just around $1.3 billion. Thus, there's a lot of growth opportunities here. Let's give this company a closer look.

Solid financial performance and capital allocationTotal revenue in the most recent quarter rose 5.8% to $232 million, as the company's same-store sales climbed 0.5% and five newrestaurants opened. This revenue growth, combined with a record restaurant-level cash flow margin of 20.9%, shows that BJ's is succeeding inboth driving top-line growth and focusing on operational efficiency at the individual restaurant level. The end result was a 55% jump in net income versus the samequarter last year.

The company continues to invest in organic growth through opening new restaurants. It's been able to successfully open new locations while retaining enough cash flow to opportunistically repurchase and retire shares.

A poor share repurchase strategy can be akin to setting shareholder money on fire. But while BJ's has only been buying back shares since 2014, there are a few clear signs that make me think management knows what it's doing here. When the first repurchase plan was authorized in April 2014, the stock was near a five-year low of around $30 per share. With the price now back near $50, management was correct in determining that BJ's stock was undervalued at the time.

The company has retired 3.8 million shares at an average price of $38.55. These repurchases haven't hampered management's intended growth plan or saddled the company with crippling debt. CFO Gregory Levin on the most recent conference call reaffirmed that "we continue to use our strong cash flow from operations to execute on our national expansion plans while opportunistically repurchasing shares."

Huge runway for future growthThe company has a ton of future growth potential, both in the number and geographic location of its restaurants and in its relatively small market capitalization.

BJ's Restaurants currently has only 165 restaurants in 21 states, but management's stated goal is to run at least 425 across the nation. That means there are many years of growth ahead before market saturation sets in. The company is pursuing a long-term strategy of increasing restaurant operating weeks greater than 10% annually. To this end, it expects to open 16 new restaurants in 2015, with expansion plans for 2016-2018 already in progress.

Part of its successful expansion has been the creation of new, smaller restaurants that are cheaper to operate. According to CEO Gregory Trojan on the Q2 conference call, "We continue to be very pleased with the returns from our new 7400 square foot prototype and have seen consistently better operating efficiency and food quality metrics from this new footprint." Smaller upfront costs and increased operating efficiency should allow BJ's to grow revenue faster and better convert that revenue into free cash flow.

With a market cap of only around $1.3 billion, there is an opportunity for BJ's to double or triple its market cap over the next five to 10 years and still have plenty of room to grow.

Opportunities for healthier, and not-so-healthy, eating

Source: BJ's Restaurants.

BJ's has made a strong effort recently to reduce the number of items on its menu from 184 to 139 and to create healthier options for its customers. Consumers are looking for healthier choices when they dine out. While a deep-dish pizza or burger might be a delicious treat once in a while, restaurants need to provide healthier options to continue to drive repeat traffic.

To that end, BJ's has unveiled what it calls an EnLIGHTened menu, on which no entree consists of more than 795 calories. One in every three guests is now ordering an item from this better-for-you category.

BJ's is also making inroads as a popular location forwatching sporting events. Sports bars are atraditionally fragmented business, and BuffaloWild Wings has done the best job of becoming a "category killer" in this space. But while BJ's provides a differentexperience from its competitor, I believe it can stillcapture some market share from local sports bars for watching big sporting events and weekly NFL football.

ValuationBJ's currently trades for about 27 times forward earnings, higher than the 18.3 forward earnings multiple of the average S&P 500 company. Its forward P/E compares favorably with its five-year average of 43.5, though: even with the stock currently trading close to all-time highs.

If management can continue to execute on its growth plan, allocate capital efficiently, and improve the operational efficiency of its restaurants, I think BJ's has market-beating potential over the next five to 10 years. If you're looking to add a restaurant stock to your portfolio, this is a good one to put on your watch list.

The article Things I Liked From BJ's Restaurants, Inc.'s Latest Quarter originally appeared on

James Sullivan owns shares of BJ's Restaurants. The Motley Fool recommends BJ's Restaurants, and both recommends and owns shares of Buffalo Wild Wings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.