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Karcher Shares Still Tempt the Analysts

June 14, 1987|Frederick M. Muir

Carl Karcher Enterprises stock soared to a new all-time high last week, but some analysts say there is still plenty of money to be made on the Anaheim fast-food company's shares.

The stock jumped $4 a share to $27.25 in over-the-counter trading during the week on the strength of its better than expected first-quarter earnings, announcement of bullish plans to add more than 100 Carl's Jr. fast-food restaurants to its chain in California and Arizona and declaration of a three-for-two stock split.

Despite the lofty price already reached, Paul Salazar, a securities analyst with Crowell, Weedon & Co. said Karcher shares could easily pass the $30 mark.

"Everybody is lifting their earnings estimates significantly," Salazar said. After Karcher's surprise announcement that it earned a profit of $4.2 million, or 56 cents a share, in the fiscal quarter ended May 18, Salazar immediately increased his year-end profit estimate to $1.70 a share, from $1.30. "A lot of the Street will probably go to $1.75 a share," said Salazar about other securities analysts who were also pleasantly surprised by Karcher's performance.

In fact, James J. Murren, a stock analyst with the New York securities firm of Cyrus J. Lawrence Inc., said he believes Karcher could earn $1.85 a share in the current fiscal year, ending Jan. 31, and reach $2.20 a share in fiscal 1989.

Loren Pannier, Karcher's chief financial officer, said the analysts' earnings forecasts are "within our range of expectation."

That kind of performance should translate into a higher share price, analysts said.

Karcher shares reached an all-time peak price of $26.75 in August of 1984. But then the company's plan to become the Cadillac of fast-food eateries--with menu items such as grilled trout--stalled. Karcher posted a 50% drop in earnings in fiscal 1986 and a $7 million loss in fiscal 1987, which ended in January. The company retrenched, cut back its menu, reemphasized burgers, Cokes and low prices and closed 20 restaurants in four states.

The stock fell to a low of $16.25 a share in 1986, but as the company's "back-to-basics" plan began showing results, the stock started inching its way back.

Salazar said the stock should continue to improve, based on better financial results and a growing confidence on Wall Street that the company can continue to post annual revenue gains of at least 10% indefinitely.

That could lead the Street to assign Karcher a higher multiple, or price-earnings ratio, he said. The shares are now trading at about 16 times the $1.70 annual earnings per share that Salazar has forecast. The average stock in the Standard & Poor's 500 trades at a multiple of about 19 times its expected 1987 earnings per share.

Salazar said Karcher shares should trade at a multiple at least as high as the broad market average and could draw enough investor attention to achieve a P/E ratio of more than 20 times earnings per share.

And that could send Karcher shares to $34, analysts reasoned.

Then again, Salazar isn't recommending that his clients buy Karcher shares. Officially, he has a "hold" recommendation on the stock, as most of his clients bought in in late 1985 when the shares were trading at $15.

Now that they've nearly doubled their money, Salazar reports, "It's hard to get them excited," about buying any more.

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