Alternative Valuation Models

Red Robin Gourmet Burgers has a negative residual operating income in all of the forecasted years. Residual operating income shows the amount of income the company is anticipated to earn after what is required to cover its operating and capital costs. With this framework in mind, it is concerning to see negative ROPI in all of the forecasted years for RRGB, in particular the long term viability of the company as a whole. Understanding what is driving this consistent negative value in the forecasted years is crucial in further understanding the fundamentals of RRGB. Beginning with actual NOPAT, or net operating profit after tax, is consistently low, with the last three fiscal years being negative. In other words, Red Robin has not generated enough profit from their operations to meet operating and capital costs. Consistently negative NOPAT highlights the company's inefficiency which suggests a pattern of poor financial performance. In addition to poor actual NOPAT, Red Robin has a very high weighted average cost of capital. With a relatively high WACC of 12.93%, due the company's large amount of debt coming from additional operating leases in 2019, also contributes to this negative valuation. 

Ultimately, this valuation method which relies heavily on future projections of the company's performance is not very applicable to a company like Red Robin which has had consistently negative financial performance. Given the consistently negative ROPI and NOPAT, and high WACC, these negative historical trends weigh heavily on the overall valuation. Given the negative ROPI for RRGB over the past five years, it makes sense as to why the final valuation (94.64) for Red Robin is drastically negative. Further in this post I will cover the more logical valuation technique given Red Robin's financial history. 

In this analysis, the final stock price of Red Robin Gourmet Burgers (RRGB) derived from market multiples in comparison to industry peers, including Bloomin' Brands, Chuy's, Cheesecake Factory, and Brinker. Choosing this group of competitors consisted of utilizing FactSet's key competitors data based off of Red Robins financials and industry group of service restaurants. The market multiples method involves comparing key financial metrics to those of comparable companies in the industry to estimate the implied stock price for RRGB. The market multiples considered include Price to Sales, Market to Cash Flow, Price Earnings (Trailing), and Price Book ratio. Each multiple is compared to industry averages, quartiles, and specific observations for the selected peer companies.

Based on the market multiples selected, Red Robin lags in every multiple as compared to their peers. The calculated price for Red Robin using price to sales is rather high at $41.96 a share. This is largely due to the company's high revenues per share, creating a low multiple as compared to the peer group, however as described in previous posts this revenue is not turned into profit year after year. Moving onto market to cash flow, the implied stock price for RRGB is ($8.20) a share. Given the forecasted ($1.05) cash flow per share in 2023, along with a high multiple, this makes sense. The company has not had positive operating cash flow over the past five years. Moving to trailing P/E,  RRGB's implied stock price based off this metric is ($14.78) a share. Again, Red Robin has not produced positive earnings per share over the past five years, and they are forecasted ($1.22) a share for the 2023 fiscal year. Lastly, using the price to book ratio, Red Robin's implied stock price is $2.26 a share. Using these estimated values per share, and taking an average leads to an implied stock price of $7.09 a share. Ultimately, this valuation is the most logical as compared to the ROPI, and FCF valuation methods given the fundamentals of Red Robin, their industry group, and business model. Comparing this implied stock price of $7.09 as compared to the company's current price of $10.07 implies an underweight of the security for the future.  In sum, Red Robin's poor financial history, combined with little ambition for future growth of the company, operating in a very competitive subindustry all correlate to a negative outlook for the future of the company.

RRGB Valuation Models.xlsx