The Icing on this CAKE

06/03/2013 9:45 am EST

Focus: STOCKS

John Dessauer

President, John Dessauer Investments, Inc.

Here's a stock with big expansion plans, and another one looking to reap the rewards from selling key segments, says John Dessauer of John Dessauer's Outlook.

Cheesecake Factory (CAKE) had an excellent opening quarter that comfortably beat analysts' expectations. CAKE earned 47.8 cents per share in the quarter. That was up 27% from last year and 5 cents better than the average analyst estimate. If you exclude Superstorm Sandy, comparable-store sales were up 2%.

Expansion plans call for eight to ten new stores in the United States this year. CAKE is also expanding internationally through licensing agreements that cost CAKE nothing in the way of investment.

Management has raised 2013 earnings guidance to $2.12 to $2.18 a share. Argus Research has a 2013 estimate of $2.20 and a 2014 estimate of $2.48. The long-term average P/E is 17, but the average for the restaurant group is 19.

Based on the midpoint of management's 2013 guidance, the stock is now trading at almost a P/E of 19. Applying a 19 P/E to the Argus 2014 estimate of $2.48 indicates a stock price of $47. The annual dividend of 48 cents (yield 1.2%) is also likely to be raised.

CAKE is clearly doing very well and has a clear growth strategy.

Meanwhile, there is exciting news from GlaxoSmithKline (GSK). No, it's not about the first-quarter results. They were as expected. Sales were down 3%, and per-share profits were down 6%. First-quarter sales and earnings were actually quite good, but last year was even better, making the comparison difficult.

Profits this year will likely be $3.60 a share, about the same as in 2012. The dividend has also been increased 6%. That will increase the dividend yield to 5.7%. Without the news, Glaxo is a low-risk, attractive, long-term investment with an above-average dividend yield.

There are two parts to the exciting news. First, Glaxo will sell its two drink brands, Lucozade (a series of energy and sports drinks) and Ribena (British market fruit drinks). The proceeds are expected to be 2 to 2.5 billion British pounds ($3 to $3.8 billion).

While management has not said what will be done with the proceeds, the expectation is that they will be used to benefit shareholders, probably through a special dividend.

Second, Glaxo plans to create a Global Established Products portfolio. The portfolio will include more than 50 brands, with annual sales of 3 billion pounds. While there are no more specifics at this point, analysts speculate that this portfolio could be sold or spun off to shareholders.

So Glaxo shareholders may be in for a windfall in the coming 12 months. Glaxo is a buy.

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