Why Wedbush Is Betting Big on Del Taco

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Del Taco Restaurants, Inc. (NASDAQ: TACO) shares saw a slight bump on Wednesday after one key analyst upped its price target on the taco chain. The upshot from this report is tasty returns for investors.

Wedbush has an Outperform rating for Del Taco with a $17 price target, implying an upside of 30% from the most recent closing price of $13.04.

Overall the firm continues to believe there is a disconnect between Del Taco’s category-leading fundamentals and its category-trailing valuation. Wedbush believes the company’s current discount to its peers is poised to narrow as management executes towards 2018 targets and as investor awareness of the company’s compelling fundamentals increases.

According to Wedbush’s report:

Believe 2H acceleration poised to drive another year of category-leading SSS [same-store-sales] growth. We expect Q2’s tough 6.9% co-owned and 7.5% franchised comp comparisons to be anniversaried with a mid-1% co-owned SSS growth rate and a mid-3% franchised SSS growth rate. We expect the next step of management’s ‘Elevated Combined Solutions’ to launch in early Q3, with an all-new ad campaign accompanying new menu boards, new employee uniforms, and compelling menu innovation, including one or more items at value price points. We view incremental menu price increases towards 3.5% in Q3 and 4% in Q4 (up from 3% in Q2 and 2.5% in Q1), as incremental SSS growth drivers as well. While we model a flat mix expectation in 2H:18 due to an expectation of adding value-priced items to offset any potential pushback from the higher price increases, given the historical tendency of TACO customers to view the items as add-on purchases instead of substitutes, we are optimistic mix could remain positive. We do expect these items to deliver positive transactions in 2H:18. Our current 2018 system SSS growth estimate of 3.8% stands second only to [Domino’s Pizza] in the QSR category.

Also as management continues to work to grow average unit volumes (AUVs) and maintain top quartile margins, Wedbush expects a steady improvement in Del Taco’s cash on cash (CoC) returns to coincide with a steady acceleration in its net system unit growth rate.

Finally Wedbush noted that while no shares were repurchased in Q1, the firm expects repurchases to resume in Q2. About $21 million remains under the current authorization.

Shares of Del Taco were last seen at $13.12, with a consensus analyst price target of $15.06 and a 52-week range of $10.00 to $15.99.