We downgrade California Pizza Kitchen, Inc. (CPKI) to a Hold from Buy, as we expect the company to continue from suffering declining traffic, the de-leveraging of its rent expense, and shrinking return on equities throughout 2008. Morover, the shares are trading at 20.5x our estimates and 17.8x consensus, well above CPKI's growth at a time when there is reduced visibility and above-average estimate risk.
However, we expect CPKI can rebuild momentum in 2009, grow earnings at a mid-teens average rate over the next five years by adding full-service restaurants in existing and new markets, increasing comps and restaurant margins through its new prototype restaurant design, further penetrating the fast casual market with the new ASAP concept, repurchasing shares, and building its lucrative Kraft frozen pizza licensing business. With a chain of just 239 restaurants, we think the company can grow the units at an average rate of 10 percent annually, while keeping an eye on profitability.
When California Pizza enters new markets, it takes on an increased number of risks because it is less familiar with the areas, local tastes and preferences. Again, if the company's signature individual pizzas lose appeal, earnings and the stock price may be adversely affected. We have a target of $15 on the stock.
Read the full analyst report on CPKI
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