5 Reasons Why Del Taco (TACO) Is A Good Stock To Buy Now

Del Taco Restaurants Inc. (NASDAQ:TACO) looks promising at the moment. The stock has rallied 18.6% in the last year, outperforming the industry’s gain of 4.9%.

In fact, we are positive on this Zacks Rank #2 (Buy) company’s prospects and believe that the time is right for you to add the stock to portfolio as it is poised to carry the momentum ahead.

Upbeat Q2 & Outlook: Recently, the company reported strong second-quarter fiscal 2017 results. Herein, net income grew more than 9% year over year while adjusted EPS (earnings per share) remained flat. Revenues of the company rose 8.6% from the prior-year quarter. Remarkably, Del Taco recorded a system-wide comps growth of 7.1%, marking the 15th consecutive quarter of positive comps for the company.

This strong performance led to raised fiscal year 2017 guidance. Del Taco now expects comps to grow 3.5%-4.5% (up from previous estimate of 2%-4%). Revenues are expected to total between $470 million and $476 million (previously $466 million and $476 million).

Additionally, the company expects its initiatives including effective marketing, menu innovation, limited time offers and improving guest satisfaction to keep its positive comps trend alive. Meanwhile, Del Taco is focusing on expanding its mobile and online ordering platform as well as testing out delivery options. These are expected to drive sales in the long term.

Strong Expansion Plans: Del Taco is marching toward achieving its mid-term goals of $1.5 million AUV (average unit volume) by fiscal 2018 and mid single-digit new system unit growth in fiscal 2017.

Notably, the company has 18 units either open or under construction year to date and continues to expect to open 23 to 26 new system units in the current year. In fact, its efforts to expand the business by fortifying presence bode well and should convert to a higher top line.

Meanwhile, it is to be noted that Del Taco continues to execute its unit growth strategy through a balanced combination of company-owned and franchised locations. While directly owning restaurants allows a company to have full control over operations and keep all profits, franchising minimizes capital requirements, thereby facilitating EPS growth and ROE (return on equity) expansion. Moreover, free cash flow continues to grow, thus allowing reinvestment for increasing brand recognition and shareholder return.

Healthy Growth Prospects: Currently, the company’s fiscal 2017 earnings are projected to grow 5.8%, better than the industry’s expected growth of 4.4%. Also, Del Taco’s revenues for the year are anticipated to increase 4.4% while the industry is projected to put up a growth of just 1.6%.

These figures substantiate the company’s Growth Score of ‘B’ on our style score system that helps us to identify potential outperformers.

Valuation Looks Reasonable: Del Taco has a Value Style Score of ‘B’. This score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount.

The company is currently trading at a trailing 12-months P/E multiple of 23.1 while the industry’s average stands at 25.2. Also, it is trading at a P/S (Price-to-Sales) ratio of 1.1, much lower than the industry average of 3.5.

In fact, the company’s Price-to-Book ratio (used to compare a stock's market value to its book value) is also pegged lower at 1.28 compared to the industry average of 2.67.

All these ratios deem Del Taco undervalued in comparison with its industry peers, and indicate a good time to buy.

Earnings Surprise History & Estimate Revisions: Del Taco has an impressive earnings surprise history. The company has outpaced the Zacks Consensus Estimate in three of the trailing four quarters, delivering a positive average earnings surprise of 3.61%.

Furthermore, upward estimate revisions reflect optimism in the stock’s prospects. Although fiscal 2017 estimates have remained constant over the last month, earnings estimates for fiscal 2018 have moved up 1.7%, reflecting two upward revisions versus none downwards.

Key Picks

Some other top-ranked restaurant stocks include Domino’s Pizza, Inc. (NYSE:DPZ) , Bravo Brio Restaurant Group, Inc. (NASDAQ:BBRG) and J D Wetherspoon plc JDWPY. All of these companies carry the same bullish rank as Del Taco. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the trailing four quarters, Domino’s and Bravo Brio pulled off an average positive earnings surprise of 6.75%, and 7.01%, respectively.

J D Wetherspoon’s current-year estimates climbed 4% over the last two months.

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