FAT Brands Inc. (NASDAQ:FAT): A 42% Undervaluation Opportunity?

FAT Brands Inc. (NASDAQ:FAT), a multi-brand restaurant franchising company, has seen its stock price decline by 42% from its 52-week high, presenting an intriguing opportunity for investors. However, the question remains: is this undervaluation a sign of a bargain or a red flag? This article explores the key drivers behind FAT Brands' undervaluation and assesses the potential catalysts that could lead to a revaluation of its stock price.

FAT Brands' undervaluation can be attributed to several factors, including the company's recent acquisition of Smokey Bones and the impact of changing consumer preferences on its sales and growth prospects. The acquisition of Smokey Bones in September 2023 led to increased costs and expenses, which negatively impacted the company's earnings. Additionally, the company's net loss of $44.8 million in the fiscal third quarter of 2024, compared to $24.7 million in the same period in 2023, has contributed to its undervaluation.

However, FAT Brands' strategic expansion and development deals, such as the 225 development deals signed year-to-date, indicate a strong pipeline and potential for future growth. Furthermore, the company's focus on accelerated growth in its Polished Casual category, particularly through Twin Peaks, and its plans to refinance Twin Peaks' securitization debt, suggest that FAT Brands is taking proactive steps to optimize its financial structure and unlock value for shareholders.

FAT Brands' debt-to-equity ratio of 37.34 is significantly higher than its industry peers, indicating a more leveraged position. This higher debt load may contribute to its undervaluation, as investors may perceive increased risk. However, FAT Brands' recent refinancing of Twin Peaks' debt and plans for a potential IPO or alternative transaction could help alleviate this concern, potentially leading to a revaluation of the stock.

Potential catalysts for a revaluation of FAT Brands' stock price include the successful integration of Smokey Bones, the continued growth of Twin Peaks, and the potential IPO or alternative transaction of Twin Hospitality Group. Additionally, FAT Brands' strong franchise interest and development pipeline indicate a robust future outlook.

In conclusion, FAT Brands' 42% undervaluation presents an opportunity for investors, but it is crucial to carefully consider the company's ability to adapt to evolving consumer trends and execute on its growth strategies. While the undervaluation may present a compelling opportunity, investors should monitor FAT Brands' debt management and earnings growth to determine if the undervaluation is a sign of a bargain or a red flag.