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Chuck E. Cheese: Throw a Punch, Buy the Stock


Analysts say the prevalent violence at the restaurants isn't slowing business.


Would you like a night at central booking with that pepperoni pizza?

According to law-enforcement officials, Chuck E. Cheese (CEC) restaurants are hotbeds of violence, as the number of on-premise assaults officers respond to is often "far higher than at nearby restaurants, and even many bars," according to the Wall Street Journal.

One police captain said his department responds to more fights at the town's Chuck E. Cheese than at the local biker hangout.

Chuck E. Cheese does seem to be a veritable powder keg when compared with other, similar establishments, like McDonald's (MCD), Pizza Hut (YUM), Burger King (BKC), or Red Lobster (DRI).

At a Flint, Michigan, Chuck E. Cheese not long ago, an 85-person fight broke out, requiring responding police units to fill the restaurant with pepper gas to quell the disturbance.

In Brookfield, Wisconsin, a child's birthday party descended into madness when 40 people did battle in front of the restaurant's music stage, where an animatronic chicken and the Chuck E. Cheese mascot were performing.

And in Harrisburg, Pennsylvania, a woman in her thirties -- upset that a six-year-old boy was "hogging" a video game -- grabbed his tokens from his hand. The Wall Street Journal reports that child's mother confronted the woman, whose male companion began choking her and slammed her against the game console. Chuck E. Cheese employees pulled the man off the mother, and the suspects, who fled the scene, are still at large.

Chuck E. Cheese corporate has now posted signs listing prohibited behavior at 25% of the company's 538 locations nationwide.

Some of the regulations, according to the New York Post:

  • No gang-style apparel, including but not limited to hats, shirts, buckles, bandannas, towels, or other like-group apparel, accessories or decorations likely to provoke others.

  • No gang-type conduct or behavior, including verbal slogans, greetings, hand signs, or intimidation. No weapons or tools or any sort whatsoever; including knives, chains, screwdrivers, glass cutters, or scribes.

  • No obscene, offensive or hostile language or gestures.

Lynne Collier, Managing Director of Restaurant Research at Sterne Agee, can't make heads or tails of the disproportionate levels of assault and battery at Chuck E. Cheese.

Collier tells Minyanville:

I don't know. I really don't. You do see it more often at Chuck E. Cheese. It could be alcohol, it's crowded and noisy, especially on weekends, and that can be stressful for parents. From what I hear, children generally enjoy the Chuck E. Cheese experience more than the parents do, so perhaps the parents are on edge already, not being particularly happy that they're there in the first place, and the stress of the situation just gets to them. It's certainly very odd, as it's been going on for years. I've even heard that parents have actually beaten up Chuck E. Cheese himself.

As for the stock, Collier says she really likes the stock and that it's "one of the few buy-rated names I have in the space." She notes that Chuck E. Cheese "dominates the child entertainment segment, is the only real survivor in the space, is a great business in terms of margins, and is continually upgrading stores by adding new games and rides, which is usually a driver in improving same-store-sales."

Collier has a $38 price target on CEC, which she says could "prove to be conservative." She adds that CEC is "still one of the cheapest names in the space, trading at less than approximately six times cash flow."

Analyst Bob Derrington of Morgan Keegan, who was ranked number-one stock picker in the restaurant industry in the Financial Times/Starmine 2009 Global Analyst Awards, has an interesting theory on the violence:

Parents tend to be extremely protective and very defensive when they're with their kids, something we also see on the sports field. When a parent thinks their child is not being treated fairly, they may get aggressive and step in -- especially when there's alcohol involved. However, if there actually was such a big problem with violence systemwide, you wouldn't see Chuck E. Cheese reporting the kind of financial results it does.

Derrington has an Outperform rating on CEC, with a price target in the low-to-mid $40 range over the next 12 months.

"I believe this to be very reasonable, given CEC's operating trends, with current sales initiatives driving positive same-store-sales comps throughout 2010 -- which management continues to roll out as we speak," he remarked. "This will support earnings per share growth of 10-15 percent both this year and next."

Brad Ludington, an equity research analyst at KeyBanc Capital Markets who focuses on the restaurant industry, believes that while alcohol, noise, crowds, and high emotions of children's birthday parties may "play a part in the level of violence at Chuck E. Cheese locations," the numbers may be slightly skewed.

Ludington says:

There are Chuck E. Cheese restaurants near bars or other establishments that are open in the evenings, where a fight might break out and spill over into a Chuck E. Cheese parking lot, and the incident gets recorded by the authorities as having occurred at Chuck E. Cheese because that is the address they responded to. From conversations with management, the signs posted prohibiting gang activity and the like have been proactive measures the chain has taken, partially on their own, and partially to satisfy city councils and local legislators.

Ludington sees opportunity in Chuck E. Cheese as an investment, giving it a Buy rating and a $40 price target. "Current sales-driving initiatives could drive same store sales improvements and we believe there is potential for guidance to be raised above current estimates by 2H10."

In short, Chuck E. Cheese seems to be an attractive investment right now. It just doesn't necessarily make for the most relaxing evening out.

For more about the rowdiness, watch Crashing the Party at Chuck E. Cheese:

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