On Tuesday, Jefferies adjusted its outlook on First Watch shares, reducing the price target to $28 from the previous $30, while continuing to endorse the stock with a Buy rating. The decision comes after observing that the restaurant chain's first-quarter performance showed solid results, but customer traffic trends were not as strong as anticipated. Early second-quarter traffic is reportedly down in the mid-single-digit percentages.
The management of First Watch has indicated a shift towards consumer caution, opting to focus on long-term value proposition and profitable growth rather than engaging in promotions or discounting strategies. This approach is taken even as investor interest in traffic growth appears to be increasing. Despite these challenges, First Watch's margins and EBITDA for the quarter surpassed expectations, and the company has reaffirmed its full-year EBITDA guidance.
Jefferies believes that the company's conservative stance on its year-end EBITDA forecast could be advantageous. The firm suggests that First Watch has the potential to outperform the guidance as it continues to identify and implement cost efficiencies. This perspective remains in line with the maintained Buy rating, albeit with a slightly adjusted price target reflecting the recent observations in customer traffic trends and market conditions.
First Watch's strategic focus on maintaining profitability over short-term promotional gains is a key factor in Jefferies' continued positive outlook. The company's ability to beat margin and EBITDA estimates in the face of less-than-expected traffic growth underlines its operational strength. The new price target of $28 reflects a balanced view of these factors as First Watch navigates the current market environment.
InvestingPro Insights
First Watch's recent performance and strategic decisions have caught the attention of analysts and investors alike. With a current market capitalization of $1.52 billion and a high price-to-earnings (P/E) ratio of 60.94, the company is trading at a premium based on its near-term earnings growth. However, according to InvestingPro data, First Watch is also trading at a lower adjusted P/E ratio of 54.02 for the last twelve months as of Q4 2023. This suggests a slight easing in valuation that may align with Jefferies' revised price target.
The company's revenue growth remains robust, with a 22.1% increase over the last twelve months as of Q4 2023, and an impressive quarterly growth rate of 31.7%. This financial vigor is further supported by a substantial EBITDA growth of 59.0% during the same period. Despite the concerns over customer traffic, First Watch's profitability over the last year and the strong return over the last three months, with a 16.07% price total return, indicate resilience and potential for long-term value creation.
InvestingPro Tips highlight that First Watch is trading at a high earnings multiple and a high EBITDA valuation multiple, which may warrant attention from investors focused on valuation metrics. Additionally, while the company does not pay a dividend, the focus on profitability and operational strength could be a trade-off that long-term investors are willing to accept. For those interested in a deeper analysis, there are 10 additional InvestingPro Tips available for First Watch, which can be accessed to gain further insights into the company's financial health and market position. To take advantage of these insights, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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