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Bull of the Day: CEC Entertainment

Todd Bunton

CEC Entertainment, Inc. (CEC) recently delivered a strong first quarter earnings beat as same-store sales increased 1.6%.

Management also provided 2013 earnings guidance ahead of consensus, prompting analysts to revise their estimates significantly higher. It is a Zacks Rank #1 (Strong Buy) stock.

Although shares have risen strongly since the Q1 report, valuation still looks reasonable with the stock trading at 13x forward earnings. So there is plenty of room for CEC to continue running higher.

CEC Entertainment and its franchisees operate 566 Chuck E. Cheese's stores located in 47 states and eight foreign countries and territories. Chuck E. Cheese's feature games, rides, play areas, musical and comic robotic entertainment, and several dining options including pizzas.

First Quarter Results

CEC reported first quarter results on May 2. Total revenues rose 3% to $255.3 million, ahead of the consensus of $250.0 million. This was driven by a 1.6% increase in same-store sales.

Meanwhile, total company store operating costs declined 110 basis points to 67.8% of sales. However, the operating profit margin declined 20 basis points to 22.0% of revenue due to higher advertising and general and administrative expenses.

Adjusted earnings per share increased 5% to $1.86, beating the Zacks Consensus Estimate of $1.80. Part of this was driven by a lower share count as the company continued to repurchase its own stock.

Estimates Rising

Following the company's solid Q1 beat, management provided strong guidance for the remainder of 2013. The company said that it expected to earn between $2.80 and $2.95 per share on same-store sales growth of 1.5-2.5%. This prompted analysts to revise their estiamtes significantly higher for both 2013 and 2014, sending the stock to a Zacks Rank #1 (Strong Buy).

The Zacks Consensus Estimate for 2013 jumped from $2.65 before the report to $2.90 after it. And the 2014 consensus jumped from $2.99 to $3.18 over the same period.

Reasonable Valuation

Shares of CEC are up more than 17% since the company's Q1 beat. But the valuation picture still looks reasonable with shares trading at 13x forward earnings, which is in-line with its historical median.

Additionally, its price to sales ratio is only 0.8, below its historical multiple of 1.0.

The Bottom Line

With rising sales and EPS, strong earnings momentum and reasonable valuation, CEC Entertainment offers attractive upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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