Del Taco: Slow-Growing, Debt-Heavy Firm Needs Catalysts For Upside

Del Taco Huntington Beach, CA

Operating in the promising segment of Mexican food in the US, Del Taco Restaurants, Inc. (TACO) is facing sliding sales growth and narrowing margins. The slower revenue growth has squeezed promotional spending, which in turn squeezes revenue. Higher leverage and falling cash flows have slowed the expansion, and rising minimum wages in California and sizable debt repayment due next year darken the outlook.

The EV/ EBITDA multiples ranging from 11.3x to 13.1x, EBITDA margins of 11.5-12.0% and year-over-year (YoY) revenue growth of 3.3-4.3% over the next five years yield a fair value in the range of $7.98-9.85. The EV/ Sales multiples based on recent M&A deals suggest a price range of $7.39-9.63. Therefore, both valuations are in agreement to indicate a downside of 33.5-11.3% in the near term, suggesting a “Sell” recommendation.

With no dividends and poor cash flows, even the modest upside after five years under the most favorable conditions will not attract the medium-term focused investor. However, M&A speculation could subject the stock to high price volatility.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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