BJ's has been on fire lately. In the past six months alone, the company’s stock price has rocketed 57.4%, reaching $64.08 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy BJ's, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think BJ's Will Underperform?
Despite the momentum, we’re cautious about BJ's. Here are three reasons we avoid BJRI, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, BJ’s 3.3% annualized revenue growth over the last seven years was sluggish. This was below our standard for the restaurant sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect BJ’s revenue to rise by 3.7%. This projection doesn’t excite us and suggests its newer menu offerings will not catalyze better top-line performance yet.
3. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins tell us how much money a restaurant gets to keep after paying for the direct costs of the meals it sells, like ingredients, and indicate its level of pricing power.
BJ's has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 15.3% gross margin over the last two years. That means BJ's paid its suppliers a lot of money ($84.69 for every $100 in revenue) to run its business.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of BJ's, we’ll be cheering from the sidelines. After the recent surge, the stock trades at 24.8× forward P/E (or $64.08 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.
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