3 'Favorite Ideas' In The Restaurant Space, Courtesy Of Stephens

In a report issued Monday, Stephens analyst Will Slabaugh and associate Billy Sherrill provide an updated view of the restaurant industry, highlighting their favorite ideas in the space. They estimate that the industry as a whole is up roughly 25 percent in the LTM period, with franchised names at a mix of around 90 percent, leading the group at 33 percent.

The experts remain positive on the group’s long-term earnings and valuation expansion potential, even though “the benefits from industry tailwinds (lower gas prices, wage growth, etc.) have been more muted than broadly expected and group valuations remain above historic averages.”

Without further a due, let’s take a look at Stephens’ top picks.

Top Picks

The firm picks three Overweight-rated restaurants as its favorite stocks in the space: Chuy's Holdings Inc CHUY, Red Robin Gourmet Burgers, Inc. RRGB andBJ's Restaurants, Inc. BJRI.

Chuy’s ($34 price target) continues to be the front-runner this year, as the analysts believe “the story of new unit improvement, a continuation of solid SSS performance, and easing cost pressures could take estimates and valuation materially higher.” Although the stock is up more than 35 percent year-to-date, the experts still see upside left, and highlight that the company has “one of the highest returns on capital for building new units.”

Red Robin ($100 price target) looks, to Stephens’ analysts, as one of the most attractively priced and “positively comping” stocks in the restaurant industry. Moreover, they see various initiatives in the company (like its remodel program) maintaining momentum and driving estimates to new highs. In addition, they highlight the leveragability in the restaurant’s model, “by which a 1% change in SSS growth can drive roughly $0.30 in EPS, making any outperformance on the top line highly meaningful.”

Finally, there’s BJ’s ($58 price target), which stands as a high quality growth story in the industry, especially for the long-term. On of the things the analysts point out is the management’s success over the past couple of years. The team implemented a series of initiatives that “tackled multiple broad-based operational, menu and personnel improvements, in addition to driving more consistent and positive guest traffic back into the restaurants,” the report explains. In fact, the analysts feel the market is not fully appreciating the company’s outperformance potential in top and bottom lines, unit growth, same store sales growth, margin expansion and EPS development. This, combined with a valuation of 10.0x ’16 EBITDA makes the stock “one of the more attractive and undervalued growth names in the space.”