Carrols is well on its way to unlocking earning power that had not been obvious in prior quarters. TAST ended the year with 705 Burger King restaurants, adding 55 stores towards the end of 2015. Restaurant-level EBITDA grew by 87% to $36.8 million in the fourth quarter. Sales were up 18.7% with same store comps up 5.1%. We were also impressed with the 4.2% increase in the average check (receipt), and the gain in customer traffic.

TAST has a unique set of competitive advantages that will allow it to grow faster than the broader fast food industry. The most important advantage being the “right of first refusal” contract on 2,000 franchisees that gives us first dibs on acquiring any restaurant for sale within the territory. This also provides special merit to management’s acquisition strategy of buying restaurants for low single digit multiples of cash flow where operations and marketing can be improved to drive higher sales.

TAST is just starting to see the benefits of larger scale and a lower cost of capital. We think the market is underestimating the near term free cash flow potential of the company. Historical CapEx will be freed up for acquisitions as it completes the re-imaging of old stores to the 20/20 refresh model. Future acquired stores requiring the remodel expenses will have a lower impact on cash flow considering the larger store base. We also look forward to eventual buybacks and an investment-grade bond rating.

Lastly, we think TAST’s recent 2016 guidance of ~$950 million in sales, and $80 – $90 million in EBITDA underestimates the company’s potential this year. Projections do not include acquisitions or meaningful improvements to underperforming stores. At a valuation of ~0.63% EV/sales and 6x our estimate of EV/2016 EBITDA we believe stock remains undervalued.

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This post has been excerpted from the JDP Capital Management Q1 2016 Letter to Limited Partners.