Holy crap did Habit Restaurants (NASDAQ: HABT) crush it yesterday!
On its first day of trading, the stock catapulted 119%.
Not that most retail investors would’ve been able to grab shares early enough to realize such a monumental gain. Although trend chasers could’ve picked up an easy 10% to 15% before the closing bell.
The question is, where will HABT be next week, next month, next year?
A number of analysts are comparing HABT to Chipotle (NYSE: CMG). I suspect this is based on the early gains and not on the actual business. These are two completely different kettles of fish.
Now because I’m not personally familiar with Habit, I had to do a little digging and make a few phone calls to some friends in California to find out more about this place. Why California? Because that’s where the company generates two-thirds of its revenue.
Of the three folks I called, all three were familiar with the restaurant, and all three said their burgers are pretty good. Although none of them seem to be regulars.
Checking out Habit’s menu, it doesn’t seem to be particularly exciting. And it certainly doesn’t offer the sustainability cred Chipotle has used to maintain a loyal customer base. At Habit, customers can get everything from a burger to a pastrami sandwich to a Caesar salad. Basically your typical fast food offerings. Although in all fairness, my friends swear the burgers are better than what you might find from the likes of McDonalds or Burger King.
Respect the Burger
Habit proudly boasts its “Respect the Burger” motto. Check it out …
This is, for lack of a better word, stupid. Although I’m sure there are plenty of folks who will read this and get all geeked up over “respecting the burger.”
Instead of “respecting the burger,” how about respecting the cow from which the burger was made? I’d be a lot more impressed if these guys sought out pasture-raised beef, free from hormone cocktails and GMO feed. But hey, it’s a fast food restaurant. If you want to deliver this stuff at fast food prices, you’re not going to pony up the coin for better ingredients. And in all honesty, Habit’s pricing is actually quite competitive.
As far as the quality of the food, Habit does offer an “Our Quality” link on its site. I clicked it and it took me to a YouTube video of employees making burgers. I saw patties on the grill, spongy hamburger buns being dressed with mayonnaise, pickles and tomatoes, tasteless iceberg lettuce being chopped and a cute Latina taking a food order from a customer. So yeah, I’m still curious about the quality of Habit’s food.
For FY, 2013, Habit pulled in $5.75 million in net income on just over $120 million in sales. A pretty decent jump compared to about $84 million in sales and $3.1 million in net income for FY, 2012 – and a monumental jump from $0.1 million in net income on $28.1 million in sales in 2009.
The company is using proceeds from the IPO to expand its operations and pay down debt. Heading into the IPO, it was only carrying about $14 million in debt. This should make it pretty easy for the company to expand aggressively through debt financing.
Also worth noting is that Habit has enjoyed 42 consistent quarters of positive same store sales growth. That’s pretty damn impressive.
Overall, management seems to be top-notch and it’s got a product that people want to buy.
Heading into the future, I must admit that I’m not big on investing in restaurants that rely so heavily on beef. Beef prices will continue to soar going forward as droughts and other extreme weather conditions pound the crap out of the Midwest. The advantage for Habit, however, is that management has been able to weather recent price increases pretty well. I’m not exactly sure how they do it, but that’s probably why I don’t run a million-dollar fast food company.
That being said, if I were bullish on fast food restaurants, I’d actually consider picking up a few shares of Habit after the IPO euphoria wears off. The stock crossed the $40 mark in after hours on Thursday. I’m not particularly confident this is a fair valuation. I’d like to see the stock deflate to levels below $30 before sniffing out a good entry point.
In conclusion, I suspect the food probably sucks just like most fast food. At least for my food snob palate. But as far as fast food restaurants go, Habit seems to have a good thing going.