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Mmm, Cheesecake

Shares of The Cheesecake Factory (CAKE) (CAKE) have curdled lately, falling from 38 in February to 28 on June 7. But despite disappointing first-quarter sales, the company's long-term growth prospects, backed by "rock-solid financials," are intact, says Jack Russo of A.G. Edwards (AGE). He forecasts annual earnings increases averaging 22% over the next three years. Russo upgraded the stock to a "buy" for aggressive investors, with a 12-month target of 40. Cheesecakes account for just 5% of the company's $1.2 billion in sales. Its big money-makers are seven Grand Lux Caf?s and 105 high-end casual restaurants that offer 18-page menus and 50 varieties of cheesecake. Restaurant sales, averaging $11 million a year, are tops in the industry, analysts say. \

Over the next few years, Cheesecake aims to more than triple the number of its restaurants to 350, taking in $3 billion a year in sales. Next year it will open its first Southeast Asian restaurant, in Los Angeles, the prototype of a new chain. At 25 times Russo's 2006 earnings estimate of $1.10 a share, the stock now trades at its lowest p-e ratio in five years. That makes Cheesecake a compelling buy, says Nicole Miller of ThinkEquity Partners, because it sells at a steep discount to its peers. Miller figures it will earn $1.32 a share in 2007. "[With its] solid cash position and superior management," she adds,"we believe Cheesecake can hit our projections and execute its growth plans."

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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