Boston Chicken May Really Be Laying An Egg

Boston Chicken was one hell of an IPO: The stock zoomed from its offering price of 20 a share to 51 in one day, Nov. 8, 1993. Since then, the stock has cooled somewhat, to 37. Does that make it a compelling bargain now?

"Forget it," says a veteran restaurant-industry analyst, who has scrutinized what he calls Boston Chicken's "aggressive type of accounting" and "unimpressive earnings outlook." He disagrees with the bullish opinions of analysts at Merrill Lynch and Alex. Brown, which underwrote the IPO.

This analyst, who's at a major Wall Street house, says the stock "is terribly overvalued." He figures the company, whose 330 quick-service restaurants (mostly franchised outlets) specialize in rotisserie chicken, can achieve only half of the 13% store-level margins that the bulls are projecting. And sales, he adds, which are initially buoyed by new-restaurant openings, aren't rising as fast as expected. The company's goal is to have 525 restaurants by the end of 1994.

A New York hedge-fund manager, who has been shorting the stock, notes that Boston Chicken lags behind such chains as IHOP (International House of Pancakes), Au Bon Pain, and Bob Evans Farms in sales per square foot. These companies trade at price-earnings ratios ranging from 17 to 33. Boston Chicken's p-e of 51 is based on 1994 earnings estimates of 70 cents a share.

WELL SCRAMBLED. The New York money manager contends the 70 cents number is "highly inflated" because it includes royalties and fees from franchisees that "are essentially subsidiaries." The company's contract with franchisees, most of whose capital needs are financed up to 75% by Boston Chicken, stipulates they can convert their loans into equity after two years and become 66%-owned Boston Chicken subsidiaries.

To this pro, the royalties and fees are really intercompany fund transfers--but Boston Chicken counts them as revenues. If these royalties and fees were removed from revenues, he says, Boston Chicken would show a 1994 loss. He contends that, because of high food costs and expenses, on a per-unit basis most of the Boston Chicken franchisees have yet to show any profits.

Mark Stephens, Boston Chicken's chief financial officer, disagrees. He says the restaurants are profitable, and he rejects the notion that the royalty and fee payments are "intercompany fund transfers." The payments, he explains, "come from the franchisees' operating profits and not from the financing we provided. We are no different from other franchisors." Steven Rockwell of Alex. Brown figures the company will earn $1.15 in 1995.

Before it's here, it's on the Bloomberg Terminal.