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4 restaurant stocks to sink your teeth into
Americans are spending more of their food dollars at restaurants. From wild wings and cheesecake to burgers and beef, here are four companies capitalizing on that trend.
By Robert Walberg
Two things Americans love to do during the holidays are shop and eat. But while consumers are doing more of their shopping at home via the Internet each year, theyre doing more of their eating at restaurants.
Sales at the nations 878,000 restaurants are expected to top $440 billion in 2004, up roughly 3% over last year, the National Restaurant Association says. Though below the 7% average annual growth rate over the past 34 years, this years number is running slightly ahead of earlier expectations thanks to a strong finish.
The Restaurant Association's Restaurant Performance Index jumped 0.9% in October, following a 0.1% gain in September. Bolstered by gains in both the current and expectations components, the index rose to its highest level in five months. So investors can expect the industry to begin 2005 as it's ending 2004 -- on a high note.
Of course, just as changes in fashion trends can make or break the fortunes of retailing stocks, changes in dietary habits can influence restaurant results. The biggest influence over the past few years was the Atkins diet, which bolstered egg and meat sales while seriously cutting into bread and pasta sales. Restaurant chains like California Pizza Kitchen (CPKI, news, msgs) and Olive Garden, a unit of Darden Restaurants (DRI, news, msgs), experienced sluggish sales, while steak and seafood houses like Outback Steakhouse (OSI, news, msgs) and Landrys Restaurants (LNY, news, msgs) enjoyed better-than-industry revenue growth.
Pass the pasta
Now the Atkins fad is dying down, so pasta chains have led the sector over the past several months. Since mid-year, the stocks of California Pizza Kitchen and Darden have climbed about 27% and 35%, respectively, while Outback Steakhouse is up about 4.4% and Landrys has slipped about 4%.
Diet trends aside, the bigger, more important trend investors need to focus on is that we're a country on the go that wants its food to go -- or at least prepared by someone else. With the restaurant industrys average share of Americas food dollar nearly doubling since 1955, and with sales expected to approach $580 billion by 2010 (up 22% from current levels), theres still plenty of opportunity for investor portfolios to get fat off the success of restaurant stocks.
One company that has enjoyed gluttonous results of late is Buffalo Wild Wings (BWLD, news, msgs). Sales last quarter jumped 37% year-over-year, with same-store sales increasing by an impressive 7%. Though management expects tough comparisons to a strong period a year ago to lead to a more modest same-store sales figure in the fourth quarter, the end result should still be impressive with total sales and earnings growth north of 20%. Given its aggressive expansion plans and lean operations, the Street expects earnings to grow by more than 32% in 2005.
Assuming the company merely lives up to this target, the stock is cheap at 31 times next years estimated earnings, or one times its growth rate. The industry average price-to-earnings-to-growth ratio is 1.8 times. Whats more, the company is sitting on nearly $4 per share in cash. Backing this figure out, the stock looks even more attractive at only 27 times next years earnings. For technicians, who watch a stock's movements for clues about its future path, theres minor resistance at $35.14 a share. But a break above this ceiling could lead to an intermediate-term move to more than $40 a share.
Good, simple fare
Another growth story to get excited about is The Cheesecake Factory (CAKE, news, msgs). This restaurant chain, with its expansive menus and huge portions of good, simple fare, is up 26% from its mid-year low and nearly 10% year-to-date. Earnings and sales have consistently bettered the industry average over the past few years, and the Street expects more of the same next year. Earnings in 2005 are projected at $1.66 a share, up 26.5% from expected 2004 earnings of $1.32.
Though the stocks price-to-earnings and price-to-sales multiples are a bit high relative to peers, the premiums are warranted by the companys superior growth rates and by operating profit margins that run close to two times the industry norm. With fewer than 100 restaurants nationwide, theres still ample room for the company and its stock to grow. As long as support in the $44 a share area holds during any near-term correction, look for Cheesecake Factory to test $55 to $58 a share over the next six to 12 months.
For investors who have a hard time digesting the kind of multiples sported by Cheesecake Factory and Buffalo Wild Wings, there are two compelling value plays in the sector. First up is Champps Entertainment (CMPP, news, msgs). These large-scale restaurants typically offer consumers a wide variety of sandwiches, burgers and pastas in a lively environment with plenty of TVs and music.
With only about 60 restaurants across the country and a market capitalization of just over $100 million, Champps isnt for every investor. Aggressive growth-oriented types, however, have to be attracted by expected earnings growth rates in fiscal 2005 and 2006 of 15.3% and 22%, respectively. Value investors will also find the estimated P/E ratios of 14.6 times and 11 times, respectively, appealing. Trading at just one times its projected long-term growth rate of 20%, the stock has upside over the next 12 months to around $11.60 a share, or 46% above the current price.
Nothing like a good steak
Then there's Outback. Its been a tough year for Outback, what with the Atkins fad dying and beef prices skyrocketing. Nevertheless, the stock has eked out a small gain of 4.5% over the past 52 weeks. It also trades at only 17 times next years estimated earnings of $2.54 a share and one times trailing 12-month sales, both of which mean the stock is cheap.
Investors should also note that Outback sports a nice little dividend yield of 1.2%, as well as a respectable return on equity of nearly 16%. As beef prices stabilize, look for Outbacks stock to gain some more traction. Based on an assumption that the stock should trade closer to 1.5 times its long-term growth rate of 14%, theres potential for a nice gain of as much as 32% over the next 12 to 18 months. Most investors would be happy to sink their teeth into that kind of gain.
For the record, the three restaurant stocks I recommended in November 2003 -- California Pizza Kitchen, Cheesecake Factory and Outback Steakhouse -- are up by 35%, 19% and 3.4%, respectively. Obviously, Im back for another helping of Cheesecake and Outback, but I find the valuations a bit too rich at California Pizza Kitchen.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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