Del Taco Restaurants, Inc.

TACO Details

Del Taco Restaurants, Inc. (NASDAQ: TACO) operates and franchises Del Taco, a quick-service Mexican-American restaurant in the United States. As of June 15, 2021, the company had 601 restaurants in the United States, most in the Pacific Southwest. Restaurant sales, franchise revenue, franchise advertising donations, and franchise sublease are its primary sources of revenue. As of September 14, 2021, the company's market capitalization stood at USD 316.98 million.

Geographic Expansion: On September 13, 2021, TACO announced its plan to launch ten units in Virginia, a new state on the TACO roster, under an agreement with Bharat Patel and Steve Kissel of Virginia Taco, LLC. The agreement would make Virginia the 17th state where TACO has a presence.

This follows the September 07, 2021 news of TACO's newest multi-unit contract with Singh and Bassi Group (Aman Singh, Ajay Singh, Navdeep Bassi, and Shubegh Bassi), which would add ten additional stores in Florida. With this deal, the franchisee family of Singh and Bassi obtain exclusive rights to Florida's Indian River, Brevard, and Volusia counties in Space Coast and Treasure Coast areas.

H1FY21 Results: The company reported a 12.18% increase in total revenues to USD 240.50 million during H1FY21 (ended June 15, 2021) compared to USD 214.38 million during H1FY20 (ended June 16, 2020), primarily due to an increase in company-operated and franchise-operated same-store sales. Its net income for H1FY21 amounted to USD 8.63 million vs. a net loss of USD 103.04 million reported in H1FY20. As of June 15, 2021, the company's cash and cash equivalents amounted to USD 6.58 million, and the total debt was USD 109.61 million.

Key Risks: TACO is in the restaurant business, which took a massive hit due to the COVID-19 pandemic. The lockdowns and travel restrictions imposed to prevent its spread resulted in a significant drop in worldwide commercial activity throughout the industry. Suppose this downward trend continues due to the new COVID-19 Delta variant, it will influence customers' discretionary spending on leisure activities, resulting in a decline in revenues and cash flows.

Furthermore, in FY20 (ended December 29, 2020), restaurants in Southern California accounted for 74% of TACO's sales. Hence, any adverse change in economic conditions in these regions might substantially impact its financial performance.

Outlook: TACO anticipates its FY21 capital expenditure to be in the low USD 30 million range and its general and administrative expenditures to be 9.0% of total sales, according to its Q2FY21 press release. During FY21, it also aims to open four company-operated restaurants and nine franchised locations, of which three company-operated and seven franchised restaurants have already opened.

Valuation Methodology:  Price/Earnings Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

TACO Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: TACO stock price fell 23.77% in the past six months and is currently leaning towards the lower-band of its 52-week range of USD 7.23 to USD 11.99. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 44.79. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 10.32. Considering the correction in the stock price, geographical expansion, decent financials, current valuation, and associated risks, we recommend a "Speculative Buy" rating on the stock at the closing price of USD 8.50, down 2.41% as of September 14, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.