On The Money: Getting to Know You

How one restaurant analyst gets acquainted with her companies.

By David Farkas, Senior Editor -- Chain Leader, 6/1/2007

Ever wonder how restaurant analysts pick the stocks they cover? We recently grilled Senior Research Analyst Amy Vinson of Avondale Partners in Nashville, Tenn., who is in the midst of expanding coverage, on what she looks for in a restaurant company.

What metrics have to be there for you to consider covering a company?

I look at the industry in its various pieces before looking at specific names. High-end, specialty casual, casual, fast casual and QSR. I look at valuation metrics for each group and what the consumer is doing. Are gas prices high, making a case for trade-down from casual dining to QSR highly probable?

Do you ever rely on your gut?

After coming up with a thesis and a reason to investigate, I look to see if there are any names that have compelling stories, new management teams, new franchise programs or new menu revamps. This is where gut reaction or instincts come into play. A lot of times I have to use what I know about the industry and often speak to the private players to double-check.

Say you do come up with a name.

Then I try to find a means or an excuse to meet with management informally, like at an industry conference or a trip through town. The endgame being to validate the management team.

Once you decide to visit a headquarters, whom do you talk to?

It’s my goal to see as many people as possible and obviously as many of the Cs as possible—CEO, CFO, COO. I also want to talk to heads of marketing, food and beverage, and franchising, if that is important to the story. The vice president of real estate or development is always a good person to have a dialogue with.

What do you ask the CEO and the CFO?

Who is the customer? Who do they want the customer to be? How fast do they want to grow the concept? Who do they view as their most problematic competitors? A lot of people will ask, "What keeps you up at night?" This is not one of my favorites because the answer is always as cute as the question. I try not to use the meeting with a CFO to go through the minutia of the financial models. I prefer to ask about their goal or vision for growth in, say, revenue, cash flow and capital expenditures. I’ll ask under what scenario they’d be willing to spend more cash and what scenario they’d rein in spending.

What red flags will cause you to pass on a company?

First, a management team that doesn’t seem to understand who their customer base is. Two, disappointing channel checks with real-estate people or suppliers. And three, a management team, particularly the CEO or CFO, that doesn’t seem willing to recognize faults and flaws with the company or operations. There’s another, and that’s a company in an overcrowded segment without any discernable points of difference.