Cara Operations Ltd. Beefs Up With The Keg: Time to Buy?

Cara Operations Ltd. (TSX:CARA) makes a move towards the finer side of dining. Here’s why The Keg acquisition should leave investors hungry for shares.

| More on:

Cara Operations Ltd. (TSX:CARA) is a dine-in restaurant stock that’s a fantastic way to play the rise of the millennial generation, who clearly value experiences like fine dining over materialistic goods versus their baby boomer parents.

While incredibly cyclical, I believe dine-in restaurants offer Canadian investors a unique and intriguing opportunity at these levels, especially after the $200 million ($105 million cash and ~3.8 million Cara in stock) deal to acquire Keg Restaurants Limited. The Keg Royalties Income Fund (TSX:KEG.UN), a 5.82% yielding security, will still remain following the closing of the acquisition, so The Keg’s existing investors won’t need to make any impulse decisions following the deal, as the royalties will still be distributed as usual with Cara in the mix.

Cara’s beef-up lays down a promising U.S. growth foundation

The Keg complements Cara’s finer dining brands in Milestones and the Bier Markt, but more notably, the newly acquired premium steakhouse offers Cara an intriguing foundation for a potential expedition into the U.S. market, with 10 U.S.-based locations being instantly added to Cara’s impressive portfolio of Canadian dine-in brands.

Steak is essentially the national food of the U.S., so the deal opens up a window of opportunity for a potential U.S. expansion — an endeavour that could gradually make Cara a more robust growth engine over the longer-term.

Investing in what millennials value most

The Keg is arguably one of the fanciest restaurants out there, with millennials willing to fork over a larger chunk of their paycheque on experiences such as fine dining.

It’s not just about the juicy steak either. It’s about the ambience, the decor, and the finer details that come with a classy fine dining experience. The Keg has done an impeccable job with its recent renovations in order to maintain its upscale look, which is absolutely vital if you’re going to charge customers a hefty premium on menu items.

The Keg will likely drive Cara’s margins higher as the chain continues to expand, and as millennials replace their baby boomer counterparts in the workforce over the next decade, I think The Keg stands to be a major beneficiary. The Keg is all about product quality, consistency and freshness — traits that millennials value versus prior generations.

Valuation

Cara currently trades 16.34 trailing price-to-earnings multiple, a 2.7 price-to-book multiple, a 2.3 price-to-sales multiple and a 10.8 price-to-cash flow multiple. The stock’s by no means expensive, even after the ~10% surge following The Keg acquisition. Cara has a very solid portfolio of dine-in brands, and at current levels it makes for a perfect buy for investors looking to play the rise of millennials and an increase in consumer spending.

I think Cara is both an undervalued and unappreciated stock when you consider the company’s promising ~18.1% ROE (for the trailing 12 months) and the fact that cash flows are both stable and ample. With the latest Keg acquisition, it’s clear that Cara’s gravitating towards the finer side of dining — a move I believe will pay off major dividends as the millennials continue to become richer.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »