Stephens: What Restaurant Investors Should Know Now

In a report published Monday, Stephens analysts said that the stock performance in the Restaurant industry had been mixed during the quarter with the quick-service industry notably outperforming the other segment. The 1Q EPS and SSS beats outnumbered misses, benefiting from consumer tailwinds.

With valuations remaining at or near all-time highs, the analysts focus on:

• Undervalued names, like Chuy's Holdings Inc CHUY - Rated Overweight, with a price target of $34.
• Transformative stories, like McDonald's Corporation MCD - Rated Overweight, with a price target of $115.
• Companies with room for valuation and numbers to still move higher, like Red Robin Gourmet Burgers, Inc. RRGB - Rated Overweight, with a price target of $100 - and Texas Roadhouse Inc TXRH - Rated Overweight, with a price target of $42.

Chuy's reported its 1Q ahead of expectations, with EPS at $0.19 versus consensus estimate of $0.16. "Restaurant-level margins benefited by a 150 bps improvement in COGS and a surprise 30 bps improvement in labor, which served as a positive sign regarding productivity of lower volume stores," the report said.

The analysts expressed their optimism regarding the portability of Chuy’s model and believe that the company's long-term earnings power is undervalued at the current levels.

McDonald's reported its SSS growth and earnings short of expectations. Following the results, the focus has shifted to the new management team’s turnaround plan, revealed on May 4. The plan includes making the company's model more capital light, reassessing its financial leverage which is currently modest, and discovering new avenues of top-line momentum.

The analysts expect the plan to be positive for the company’s stock. "We continue to like the risk/reward here, given multiple levers at the Company’s disposal to drive shareholder value," the report added.

Red Robin reported robust 1Q15 results, with another quarter of SSS beat and impressive cost control. "We continue to like RRGB and view it as the most attractively priced, positively comping name in casual dining with multiple company-specific initiatives to continue driving estimates higher," the analysts said.

Texas Roadhouse posted another set of impressive quarterly results, with 9 percent growth in SSS helping in an EPS beat. "We continue to believe TXRH is a good value here, given its steady growth profile, HQ brand and mgmt. team, and beef exposure in what we believe is a topping protein market," the analysts commented.