Carrols Restaurant Group – Biting Off More Than It Can Chew?

Sometimes an idea looks good at the start, but upon closer inspection it doesn’t meet the margin of safety or other criteria. Carrols Restaurant Group is an example of this. Here is a report written for Seeking Alpha Pro that illustrates this. There is a lot of potential upside to this company’s business model, but the current valuation and the lack of free cash flow make it a “pass” for now.

Carrols Restaurant Group – Biting Off More Than It Can Chew?

One of the points I have constantly tried to emphasize in my articles is “do your own work” and do not rely exclusively on data provided by financial websites. Carrols Restaurant Group (TAST) is a classic example of how relying on financial website data can cause investors to make significant errors in their analysis. If an investor uses the data provided by websites like Yahoo Finance, Google Finance or Finviz to name a few, he will see that the company has about 23 million shares outstanding. Multiplying the shares outstanding by $4.80 a share would give the company a market capitalization of about $115 million. TAST showed up on a low EV/Sales screen I run on the restaurant industry. However, this calculation would miss the fact that there is a convertible preferred outstanding that will convert into an additional 9.4 million shares. Therefore, these financial websites are understating TAST’s market capitalization by $45 million, which is a significant difference. So anyone doing a screen based on EV/EBITDA or EV/sales or even P/E ratio, would be getting a wrong impression of the current valuation of the company. While the company’s enterprise value is being understated, it also appears as though the company’s normalized EBITDA and operating margins are being understated as well. This article will analyze the company considering both situations.

Seeking Alpha Article

 

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