It Is Time To Take A Bite Out Of Del Taco Restaurants (NASDAQ:TACO)

A Small-Cap Growth Opportunity With Big Aspirations

Del Taco Restaurants Inc (NASDAQ:TACO) is a small-cap taco chain with big aspirations. It is, technically, the U.S. 2nd largest taco chain by units but that’s only compared to Taco Bell (NYSE:YUM). The claim, prominently stated in the company’s 3Q earnings report, discounts fast-casual and sit-down chains like Chipotle Mexican Grill (NYSE:CMG), Moe’s Southwest Grill, and Qdoba. Nevertheless, the company is well-liked, has a loyal following, and aspirations for growth. That it is achieving.

Del Taco Surges After 3Q Earnings Are Released

The 3rd quarter report is good bordering on great. Revenue came in at $120.78 million which is up from the previous year, the previous quarter, and better than. YOY growth came in at 0.5%, a slim gain but a gain nonetheless and beat consensus by 0.3%. Comps grew 4.1% across the company’s footprint, about 600 stores in 15 states, led by a strong 6.5% gain in the franchise stores. Moving down to the bottom line, adjusted EPS of $0.16 beat by $0.06 or 60% and are up the same amount from last year.

The company withdrew guidance because of the pandemic but there are some comparisons to be made. To start, the consensus for 4th quarter revenue is $0.13 or down a nickel from last year. This is enough to meet the FY 2020 consensus target but, based on the 3Q results, too low. The company earned $0.18 on $157 million in revenue last year, not a number I expect the company will match but I will be surprised if It’s not close. Regardless, the outlook for next year is even better. The analysts are expecting YOY growth in the range of 33% or roughly 14% growth from the pre-COVID 2019 period.

"Positive third-quarter comparable restaurant sales for company-operated and franchised restaurants reflect our value-oriented QSR+ positioning, expanding off-premise convenience and use of innovation with the very successful launch of new fresh Guacamole and our Crispy Chicken menu. We also drove operational efficiencies and maintained our cost discipline to help slightly expand our restaurant contribution margin," said CEO John D. Capasola.

Del Taco Growth Update

Del Taco was able to open 1 new company-owned store and 4 new franchises in the 3rd quarter while only 2 franchises were closed. The company is expecting to open at least 2 new franchises in the 4th quarter with more on the way next year. The 4th quarter additions will bring the total number of restaurants to 605 including the first location in Ohio. Along with this, the company is putting more focus on eCommerce, digital, and off-premises as well as launching a new product line using Cholula hot sauce.

Analyst Todd Brooks of CL King says Del Taco can gain market share and profitably through its wide appeal, restaurants that are geared toward driving off-premises revenues and increasing efforts to connect with customers digitally. He also notes the large white space for Del Taco, with it identifying 2K markets in the U.S. seen as appropriate for a location vs. the ~600 units currently in operation. There are five analysts covering the stock and they've been raising their price targets lately.  The average rating is very bullish with a consensus price target worth more than 50% upside from recent price action.

The Technical Outlook: The Del Taco Pullback Is A Buying Opportunity

The Del Taco 3Q report sent shares shooting higher but they gave up the gains the very next day. Mounting fear within the market totally focused on the stimulus impasse shaved 28% off the price within two days. Now, the broad market outlook is still a little questionable but this stock is fast becoming a buy. The next best-target for support is near $7.25, if the market doesn’t bounce from this level a move down to $6.00 may be on the way.