Final Reccomendation

For my final valuation, I decided to value Red Robin based off the market multiples valuation method. As displayed in the chart below, based off my market multiples approach I was able to derive a target price for Red Robin Gourmet Burgers (RRGB) of $7.09 a share. Based off the other valuation methods, the Free Cash Flow, and Residual Operating Income models, the Market Multiples approach was the most fitting for my company. As detailed in the previous posts, Red Robin is unique in the sense that the other valuation techniques are not applicable to the company as a result of their historical financial performance. Beginning with the Free Cash Flow model, Red Robin has been unable to produce positive net income over the past five years. With this framework in mind, along with an estimated long term growth rate of 1.5%, the FCF valuation forecasted negative operating income for the company over the next ten years. Ultimately, Red Robin's high level of debt outweighed the sum of the enterprise value of the firm and excess assets, resulting in the value of equity to be negative. As a result, the value per share as derived from the FCF model resulted in ($10.99) per share.

Similarly, the residual operating income model is not applicable to my company as Red Robin has produced negative residual operating income over the past five years. As a result, taking the 3 year average residual operating income while assuming a long term growth rate of 1.5%, the forecasted ROPI for Red Robin was negative over the next ten years. This is true because the present value of the estimated ROPI outweighs the firms net operating and excess assets, equating to a negative firm value. Ultimately, this valuation method proved to be inapplicable to my company due to the negative ROPI over the previous five years, resulting in a value per share of ($94.64).

Nevertheless, with Red Robin not paying a dividend, the only valuation method that remained was the market multiple approach. Within this approach, 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. Using these multiples, I was able to come to a target price of $7.09 a share.

Given what is known about the financial strength of Red Robin Gourmet Burgers, my recommendation would be to sell. Red Robin's cash flows from its operations have not been sufficient over the past five years, contributing to a consistently negative net income. Furthermore, Red Robin carries a large amount of debt on its balance sheet, which requires consistent interest payments as a result of their additional operating leases from 2019. As a result, Red Robin's net income takes a hit, and shareholders are unable to be recompensated for their investment. Additionally, the high debt levels take away from the company's ability to launch new business ventures, make investments, and respond to short-term economic or industry challenges. With five years of consistently negative return on equity, a high WACC of 12.93%, largely in part to a high cost of debt of 12.12%, suggests the market sees Red Robin as a riskier investment. Additionally, Red Robin carries a beta of 1.70 (Valueline), indicating that there is a higher level of risk associated with the security. Red Robin has not announced any significant plans that would indicate an immediate transition in operations, indicating a low future growth rate for the company. Revenues for RRGB have remained relatively stagnant, and are insufficient in outweighing expenses, culminating to a negative net income over the past four years. With this information in mind, along with the extent of my previous posts covering the fundamentals of the company, all signs point toward rating RRGB as a "sell", with my calculated target price of $7.09 being less than the current stock price of $10.07. 

In terms of how my recommendation aligns with analysts on the street, there is a slight discrepancy. Using FactSet's targets & ratings technology, only three analysts are covering Red Robin Gourmet Burgers. As a result, the data is a bit skewed, with two analysts suggesting to hold the security, and one suggesting to buy. The estimates from these analysts suggest a target price of $15.50, however I strongly disagree, having covered this security over the entirety of the semester. Given the fundamentals of the company, historical performance, lack of future initiative, in my opinion there is nothing that would suggest Red Robin is a "hold" or "buy". Red Robin truly suffered from the COVID-19 pandemic, and their ability to rebound has not been evident, as reflected through their stock price and financials. If analysts are assuming a resurgence for this security to pre-pandemic levels, I believe they are mistaken.