Is Del Taco Worth Investing In? This Analyst Thinks So

About three months ago, Levy Acquisition Corp (NASDAQ: TACO) announced it would acquire U.S. fast-food chain operator Del Taco Restaurants, Inc. for roughly $500 million, including debt.

Last Thursday, Wedbush analysts Nick Setyan and Colin Radke initiated coverage on the combined company’s stock with an Outperform rating and a $19 price target.

According to the research report, they believe surging ROI, “driven by category-leading unit-level profitability and SSS growth momentum, place TACO within striking distance of category-leading unit growth.”

As investor awareness continues to increase and earnings become increasingly visible, the firm thinks TACO’s current discount to quick service restaurant peers is poised to narrow. So, the time to buy is now, the analysts add, with the stock trading barely above $15.

The note highlight four key elements to the investment thesis:

1) For the near-term, checks show that second quarter same store sales growth is tracking mid-to-high single-digits, with drivers placed to support medium-to-long term comp momentum.

2) Unit-level margins and general profitability has been expanding recently and seems poised to continue to do so in the quarters to come.

3) The experts expect acceleration in company-owned unit growth towards high single-digits by 2018, driven mainly by “improving, best-in-class, cash-on-cash returns.”

4) Franchisee unit development is also expected to accelerate, driven by attractive franchisee cash-on-cash returns, too.

For 2015, Wedbush is modeling earnings of $0.40 per share on revenue of $418.9 million; for 2016, the EPS estimate surges to $0.52 per share, on sales of $436.6 million.