Neutral on BJ's Restaurants

We maintain our long-term Neutral rating for BJ’s Restaurants Inc. (BJRI - Analyst Report). While we are optimistic on the company’s unit growth potential and solid same-same restaurant sales, the negative impact from commodity inflation as well as increased competition compel us to remain on the sidelines.

We believe BJ’s Restaurants, which owns and operates a chain of high-end casual dining restaurants in the United States, remains well positioned to sustain its growth momentum while generating improved earnings on the back of efficient operations and innovative offerings.  

The company remains committed to unit growth in 2011 and beyond, and believes that there is room for at least 300 restaurants. Additionally, the company boasts of strong financials with a debt-free balance sheet.

However, like all restaurant companies, BJ’s is also susceptible to higher input costs, which will lessen the magnitude of margin rebound. The total commodity basket is expected to grow 4% in the second half of fiscal 2011. 

The company also foresees higher payroll taxes. In fact, many states have already increased payroll taxes to help fund their unemployment deficits.  The first quarter felt the brunt of the raised tax with hourly labor dollars increasing 4% over the prior year.

Stiff competition from other players remains another concern for BJ’s. In its core Californian market, BJ’s Restaurant face stiff competition from Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Jack in the Box Inc. (JACK - Snapshot Report), Sizzler and Shakey's Pizza all of which have a strong presence in the region. So far, Red Robin has more than more than 70 locations in California while BJ’s Restaurants has 53.

Last but not the least, much of the positive attributes in BJ’s stock is reflected in the current share price and there is only limited scope for upside. Additionally, estimates have not budged in the last 60 days, implying no near-term catalyst.

Based on the above fundamentals, we expect the shares to perform in line with the market. BJ's Restaurants currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Read the full analyst report on BJRI

Read the full analyst report on RRGB

Read the full analyst report on JACK