The Chef’s Warehouse (NASDAQ: CHEF) is a distributor of specialty food products in the United States and Canada that caters to the needs of chefs who own or operate restaurants. The company is expected to announce its second-quarter results on July 28. Meanwhile, shares of CHEF have tanked 15.1 % in the past month.
However, Lakestreet Capital Markets analyst Ben Klieve believes that this weakness in CHEF stock could be driven by concerns about inflation and the reopening of restaurants, which could be hampered by rising COVID-19 cases.
Klieve is of the opinion that this could be a mistake, and advocates “building a position ahead of earnings as we see evidence of a strong recovery in foodservice sales, and we believe these risks are overstated at the current valuation.”
The analyst has a Buy rating and a price target of $40 (51.7% upside) on the stock.
Analyst’s Q2 Expectations
Klieve has projected revenues of $345 million in Q2, reflecting a rise of 72% year-over-year. But the analyst’s revenues estimate is still a drop of 16% from the second quarter of FY19, as Klieve believes that CHEF is still not positioned to return to the levels before the pandemic. Consensus revenue estimates are of $355 million.
The analyst added, “We do look for a return of EBITDA profitability driven by this top line growth.”
Now let’s look at why Klieve thinks that the risk of rising inflation and increasing COVID-19 cases could be overstated.
CHEF’s Management of Inflation Risk
Analyst Klieve believes that CHEF will continue to manage rising food costs well and likely “faced some headwind throughout the quarter, but we believe a relatively dynamic pricing structure allowed for much of this to be passed on.”
In Q1, CHEF’s selling, general and administrative expenses declined 26.3% year-over-year to $80.2 million. (See Chef’s Warehouse stock chart on TipRanks)
According to the analyst, the cost of labor and access to labor remain the bigger risks to the stock. Furthermore, Klieve said, “[we] will be looking for clarity on this during the earnings call. Even when considering both these variables, we remain comfortable with our Q2 model and make no adjustments.”
Risk of Rising COVID-19 Cases Overstated
Amid the rising COVID-19 cases, Klieve perceives little chances of renewed restrictions on indoor dining. He thinks that even if these restrictions occur, CHEF’s “customer base will be much more able to adapt than it was a year ago.”
Moreover, the analyst cited open table data that indicates that indoor dining has been on an upward trajectory throughout this year. In fact, in the past few weeks, it “has been in line with 2019 levels.”
Klieve cautioned that even if the improvement varied considerably by different markets, “we do not believe the company is yet positioned to return to its 2019 organic performance. Despite the market variability, we believe the trajectory is highly positive for the company.”
Data Indicates that Spending at Restaurants is Up
Federal Reserve data also supports Klieve’s upbeat view of the stock. The data has indicated that spending at foodservice restaurants in June this year was up 10% from the total spending in June 2019.
However, he said, considering that CHEF has more exposure to independent restaurants rather than restaurant chains, and that independent restaurants are facing “greater headwinds than chains, we believe company results lag this data. In addition, while its customer base in hotels, cruises, conference centers, etc. is not a major driver, we believe this group remains well below 2019 levels and as such presents more headwind to the Q2’21 outlook.”
High Beta Stock
The analyst perceives CHEF as a high beta stock both on the downside and on the upside. Beta is a measure to ascertain the volatility of a stock in relation to the market. Usually, a stock whose beta is higher than 1 is considered highly volatile in relation to the market.
Klieve pointed out that over the past 19 trading sessions, CHEF has been down over 16 sessions, and is down 14% versus its peer group in the “the 5-7% range over this time.”
“However, we believe it is also a high Beta stock to the upside, and we believe as foodservice demand returns and inflation fears are mitigated in coming months that CHEF can generate significant alpha [ a measure of the stock’s excess returns over the market’s returns] from the current depressed level,” the analyst added.
Turning to the rest of the Street, consensus is that CHEF is a Moderate Buy, based on 2 Buys and 1 Hold. The average Chef’s Warehouse price target of $38 implies 44.1% upside potential to current levels.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
