20% Upside For BJ’s Restaurants’ Stock When Pandemic Subsides?

We believe that BJ’s restaurants’ stock (NASDAQ: BJRI) still has more than 20% upside once the fear around the pandemic subsides. BJRI trades at $30 currently and it has lost 21% in value so far this year. It traded at a pre-Covid high of $43 in February, and it is still below that level currently. Also, BJRI stock has gained 3x from the low of $10 seen in March 2020, after the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The stock price was recently boosted after its Q2 2020 earnings where it beat market consensus by posting Non-GAAP earnings of $-0.99 (50% better than the consensus estimates). Despite the rally in BJRI stock since late March, we believe that the stock has room for growth in the near future. Our conclusion is based on our detailed analysis of BJ restaurants’ stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 50% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how BJRI and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

BJ restaurants vs S&P 500 Performance Over 2007-08 Financial Crisis

BJRI stock declined from levels of around $20 in September 2007 (pre-crisis peak) to levels of around $12 in March 2009 (as the markets bottomed out), implying BJRI stock lost 40% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $18 in early 2010, rising by 52% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

BJ restaurants Fundamentals in Recent Years Look Strong

BJ restaurants’ Revenues grew a strong 33% from $0.9 billion in 2015 to $1.2 billion in 2019, primarily due to increase in comparable sales and addition of new restaurants. Despite strong growth in revenues, the company’s margins shrank from 5% to 4%, resulting in a 27% EPS growth from $1.76 in 2015 to $2.23 in 2019. The company’s Q2 2020 revenues were 57% below the level seen a year ago, and the EPS figure for the quarter was down to $-1.38 in Q2 2020 from $0.69 in Q2 2019.

Does BJ restaurants Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

BJ restaurants total debt increased from $148 million in 2016 to $166.8 million at the end of Q2 2020, while its total cash increased from $23 million to $87 million over the same period. The company generated $14 million in cash from its operations in the first half of 2020, and this fall in cash generation could be a roadblock for the company during the coronavirus crisis.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. As investors focus their attention on expected 2021 results, we believe BJ’s Restaurants stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest. That said, the pressure on the company’s balance sheet remains a significant risk factor to the realization of these gains.

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