Seeking the Sweet Spot of Growth

06/19/2007 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, editor of John Dessauer’s Investors’ World, finds a small restaurant chain he thinks is poised to take off, plus two other larger stocks he believes to be undervalued.

Cheesecake Factory (NASDAQ: CAKE) is my newest stock. I like this company because they have no debt, aggressive growth plans, 23% per year earnings growth over the last five years, and they have never closed a restaurant.

Despite this good news, the stock is well down from last year’s $39 peak because of a modest decline in last year’s earnings, due to the inclusion of stock option costs and one less week in the fiscal year.

In the first quarter, sales rose 16%, and earnings were flat, matching analyst expectations. Estimates for this year range from $1.17 to $1.26 a share. The historic average P/E is 25x, indicating a stock value above $30, right now.

Management’s goal is to have 350 Cheesecake Factory restaurants. Now, there are only 123. In addition, there are plans to expand their eight Grande Lux Cafes to 150. Cheesecake Factory has the financial strength, the management, and the record to accomplish these goals, [which] would more than double the stock price, followed by rising earnings for many more years.

It isn’t easy to find a really well-run smaller [restaurant] chain, but Cheesecake Factory fits the description. Take advantage of the stock’s current pullback. (The stock closed above $27 Monday—Editor.) Cheesecake has the potential of a double within five years. Cheesecake Factory is a Buy.

Wyndham Worldwide (NYSE: WYN) reported adjusted first-quarter earnings of 43 cents a share, a penny better than expected and 10% above a year ago. In terms of cash flow, or EBITDA (earnings before interest, taxes, depreciation and amortization), hotels are the largest business, followed by vacation exchange and rental, then timeshare.

Wall Street likes the hotel business, but is less attracted to the timeshare business. Management says earnings this year will be between $1.98 and $2.17, with Wall Street clustered around $2.05, so the stock trades at 18x current estimates. That is a huge discount to the hotel group. (Hilton sells for 30x, Starwood 27x and Marriott 25x.) I believe this valuation gap will shrink in time, as
Wyndham’s earnings grow. That could give us a 50% gain within two years. (The stock closed at $37.45 Monday—Editor.) Wyndham is a Buy.

Deutsche Telecom (NYSE: DT) is having a rough time in the traditional phone (or land-line) business in Europe. Strong German unions make it difficult to cut costs fast enough to maintain German land-line profit margins.

Still, DT has unique strengths. Its business is worldwide, and the company is the largest telecom provider in Europe. Their American cell-phone business (T Mobile) is profitable and growing. Cash flows are strong and rising, more than $4.20 a share last year and up to $5.00 a share this year. This year’s dividend was a net $0.773, for a gross yield of 5.4%. Earnings are expected to recover to $1.15 a share this year. The price potential is $20 within 12 months. (The ADRs closed at $18.50 Monday—Editor.) Deutsche Telecom is a Buy.

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