Is Cara Operations Ltd. a Tasty Play?

Cara Operations Ltd. (TSX:CARA) is a Canadian restaurant operator with many different brands, such as Swiss Chalet, Milestones, Kelsey’s, East Side Mario’s, and St-Hubert. The company has a huge presence in Ontario, and the management team is determined to increase same-store sales by leaps and bounds over the next few years. The stock is down over 27% from its high and may be an attractive choice for value investors looking to get a nice margin of safety to go with their investment.

I think there’s a huge amount of potential for the company to expand across the country. The management team is currently staying in their circle of competence, and there’s nothing wrong with that. The Ontario market is huge, and Cara Operations wants to dominate the Ontario dine-in restaurant space.

Cara Operations is a fairly small company with a $1.6 billion market cap; going all out on international expansion isn’t in the cards right now, so don’t expect the kind of growth you’d get from Restaurant Brands International Inc. Cara Operations can be comparable to Restaurant Brands, but it doesn’t make sense to compare them directly as there are way too many differences.

The dine-in space is way more cyclical than the fast-food space; you can ride the wave of a cyclical upswing, but you could get seriously hurt if you hang on to the stock during a recession. I’m a huge fan of the buy-and-hold-forever strategy, so Cara Operations wouldn’t be a stock I’d be interested in for the long term, but I think it’s shaping up to be a great value play that may enjoy a cyclical upswing as the economy improves.

The company has over two-thirds of its restaurants in Ontario, which is expected to be a strong market for many years to come. But there’s also a considerable amount of exposure to the unstable Albertan market, which accounts for approximately 12% of Cara Operations’s restaurants. The Albertan exposure is expected to remain weak over the medium term, and it’s a huge reason why the stock is down a considerable amount from its high.

As we head into the latter part of the year, the company is expected to unlock synergies from its recent acquisitions in St-Hubert and Original Joe’s. St-Hubert is ramping up on its national food retail business and is also expected to produce and supply recipe unit products to Cara Operations’s existing restaurants across the country.

Cara Operations has more room for acquisitions, and it’s expected that the company will grow systems sales to $3.7 billion by 2022. The stock trades at a 21.73 price-to-earnings multiple, which is not cheap, but I think it’s an interesting play for those seeking a solid cyclical name.

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Fool contributor Joey Frenette owns shares of Restaurant Brands International Inc.

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