Incoming Recession May Take A Slice Out Of Cheesecake Factory's Earnings

Recession Incoming

The analyst thinks the United States will "likely fall into recession within the next 3–9 months" causing him to downgrade restaurants. Restaurants, according to Westra, tend to decline three to six months before a U.S. recession.

"~75 percent of [restaurant] names tend to outperform/underperform together throughout a business cycle — such that getting the 'sector call' correct represents the vast majority of the potential alpha creation," stated the analyst. Thus, the majority driver for Cheesecake Factory's downgrade was a downgrade of the company's sector.

Related Link: Stifel Expects A Recession Within 3-9 Months; Bearish On Restaurants

The analyst turned bearish on restaurants for three reasons:

1. Deceleration across the industry sector leads to a dining-out slowdown
2. Restaurant margins have "historically suffered 2+ years of margin-degrading negative Relative Pricing Power at the start of dining-out declines as discounting quickly ratchets-up in the face of declining sales"
3. Restaurant stocks decline an average of 23 percent in the year preceding the last three U.S. recessions

Although the analyst had confidence in Cheesecake Factory's brand positioning within the polished-casual dining segment, he is wary of the stock's "share price cyclicality" ahead of a likely U.S. recession.

According to TipRanks, Paul Westra is among the better analyst's covering Cheesecake factory. The analyst has a 66 percent success rating and an 8.2 percent average rate of return per recommendation.

At the time of writing, Cheesecake Factory traded at $50.16, down 5.25 percent Tuesday.