FAT Stock: An 11.5%-Yielding Contrarian Play with 400%+ Upside?
September 19, 2024
FAT Stock Has Great Long-Term Growth Potential
FAT Brands Inc (NASDAQ:FAT) is a great, high-yielding restaurant stock that weathered the 2020 health crisis better than almost any other restaurant stock. In fact, between March 2020 and June 2021, FAT stock ripped 1,972% higher.
The company’s stock has come under pressure again recently, too, for different reasons. However, Wall Street analysts think FAT stock will overcome this hurdle, too, with a 12-month share price target range of $15.00 to $25.00. At current prices, this points to potential gains in the range of 200% to 401%.
FAT Brands (the “FAT” stands for fresh, authentic, and tasty) is a global franchising firm that owns 18 restaurant brands, including “Fatburger,” “Hurricane Grill & Wings,” “Ponderosa,” “Twin Peaks,” and “Smokey Bones.” The company has more than 2,300 franchise locations worldwide. (Source: “FAT BRANDS INC. REPORTS SECOND QUARTER 2024 FINANCIAL RESULTS,” FAT Brands Inc, June 30, 2024.)
While most restaurants were running for cover during the 2020 health crisis, FAT Brands was expanding its empire—and it has continued to do so.
Most recently, in September 2023, FAT Brands announced that it had acquired Smokey Bones Bar & Fire Grill for $30.0 million. This was its first entry into the barbecue category. (Source: “FAT Brands Announces Acquisition of Smokey Bones Barbecue Chain,” FAT Brands Inc, September 25, 2023.)
The company has since announced plans to spin off Twin Peaks and Smokey Bones as a standalone public reporting company. In May, FAT Brands submitted all the necessary paperwork to the Securities and Exchange Commission (SEC). (Source: “FAT Brands Announces Confidential Submission of Registration Statement for Twin Peaks,” FAT Brands Inc, May 14, 2024.)
Despite strong growth plans, FAT Brands has recently faced headwinds. And this has had, as you will soon see, a big impact on its share price. In early May, the company was indicted on two violations of SOX 402 for allegedly arranging approximately $2.65 million in loans to Andy Wiederhorn, the company’s one-time chief executive officer (CEO) and current chairman of the board. (Source: “Statement from FAT Brands Regarding SOX 402 Charges,” FAT Brands Inc, May 5, 2024.)
Wiederhorn has, of course, denied all federal charges alleging that he used $47.0 million of company money as his personal slush fund and for tax evasion. (Source: “Federal prosecutors accuse Andy Wiederhorn of misusing company funds,” Restaurant Business, May 10, 2024.)
Counsel for FAT Brands responded to the allegations by saying, “These charges are unprecedented, unwarranted, unsubstantiated, and unjust. They are based on conduct that ended over three years ago and ignore the Company’s cooperation with the investigation. FAT Brands will take all necessary action to defend itself, while seeking a just resolution to these charges.”
Nothing has been reported since May on the matter. At the outset, investors spoke up loudly while running for the exits, which sent FAT stock significantly lower. The legal uncertainty is keeping the stock depressed.
Regardless, if you take a step back and just look at the company’s fundamentals and goals, you’ll see it is doing exceptionally well, which is why it deserves to be on your radar.
Strong Second-Quarter Results
For the second quarter ended June 30, FAT Brands announced that total revenue increased 42.4% year over year to $152.0 million. The big increase was due to the acquisition of Smokey Bones in September 2023 and revenue from new restaurant openings. (Source: “FAT BRANDS INC. REPORTS SECOND QUARTER 2024 FINANCIAL RESULTS,” FAT Brands Inc, July 31, 2024.)
The company has opened 45 restaurants year to date, including 24 that opened during the second quarter. It plans to open over 120 new restaurants in 2024 alone.
FAT Brands reported a second-quarter net loss of $39.4 million, or a loss of $2.43 per share, compared to a loss of $7.1 million, or a loss of $0.53 per share, in the second quarter of 2023.
Commenting on the results, Rob Rosen, the company’s co-CEO, said, “Opportunities in 2024 are abundant. Our long-term strategy is to create value through the organic expansion of our existing brands, acquire additional brands that strategically complement our portfolio, realize value from strategic divestments when appropriate to manage outstanding debt, and ultimately increase long-term value for our stakeholders.”
FAT Stock Declares Third-Quarter Dividend of $0.14/Share
Every segment of the restaurant industry is performing well, way beyond pre-pandemic levels. And that has allowed FAT Brands to continue paying one of the best dividends in the restaurant industry.
In July, the company declared a quarterly dividend of $0.14 per share, or $0.56 per share on an annual basis, for a current forward yield of 11.57%. (Source: “FAT Brands Inc. Announces Third Quarter Cash Dividend on Class A Common Stock and Class B Common Stock,” FAT Brands Inc, July 11, 2024.)
FAT Brands has actually increased its annual dividend for the last four years. It’s getting to be crunch time, though, if it wants the streak to extend to five years. For that to happen, the company has to increase its payout in the fourth quarter. In 2023, FAT Brands stock paid four quarterly dividends of $0.14. So far, in 2024, it has paid three quarterly distributions of $0.14 per share. (Source: “Dividend History,” FAT Brands Inc, last accessed September 9, 2024.)
FAT Stock Has 401% Upside Potential
As for FAT stock, as alluded to earlier, it has not fared well since the company found out in May that it was being investigated for arranging $2.65 million in loans to Wiederhorn.
While the stock has rebounded off of a 52-week low of $4.76 per share to $4.99 per share, it’s still down 12.5% year to date and 18.7% on an annual basis. Again, the underwhelming performance of FAT stock has more to do with the current SEC investigation than anything going on with FAT Brand’s actual performance.
While there’s no guarantee, it appears as though investors may have fully punished FAT stock for the current investigation. THE stock is currently changing hands near its support level of $4.76 per share, with resistance at $5.24 per share. If FAT stock manages to break that resistance level, Wall Street thinks it could soar as high as $25.00 per share over the next 12 months, which suggests upside potential of 401%. Even the lowest 12-month share price target of $15.00 points to potential gains of 200%.
Chart courtesy of StockCharts.com
The Lowdown on FAT Brands Inc
FAT Brands Inc is a great restaurant stock reporting strong revenue growth, opening new stores, and boasting strong new franchise activity. It has opened 45 restaurants so far in 2024 and plans to open over 120 new restaurants this year. FAT Brands has signed over 180 development deals year to date, compared with 226 deals in all of 2023, bringing its current pipeline development to roughly 1,100 locations.
Despite the recent SEC investigation, management believes there continues to be significant opportunities for FAT Brands Inc in 2024 and beyond with both its existing brands and strategic acquisitions. All of which should bode well for FAT stock and its ultra-high-yield dividend.
