The Axis Of The Restaurant Sector Just Shifted (Thanks To Credit Suisse)
In a report published Tuesday, Credit Suisse analyst Jason West initiated the Restaurant Sector at Neutral, noting that the group is "entering happy hour, but without the discount."
West commented that fundamentals for the group are turning more positive and multiple tailwinds should support future earnings for restaurant chains, however, these benefits are "largely captured" in current valuation.
As such, stock selection is "critical" in 2015 and beyond.
After years of sluggish traffic in a "good, but could be better" economy, restaurant comps began to accelerate in 3Q14 (+3.3 percent average same-store sales)," West wrote.
"Trends continued to improve into 4Q14 (+4.1 percent), charged by higher disposable incomes from lower gas prices (an approximately 1.0 percentage point sales tailwind in 2015) and an increasingly robust economic backdrop that features rising employment, low inflation, and low interest rates."
However, West noted a hesitation to forecast a continuation of strength given track records for disappointing traffic trends across many chains in the industry.
With that said, the analyst ranked 15 restaurants in order of investment desirability:
- The analyst's top pick is Dunkin Brands Group Inc (NASDAQ: DNKN) with a $56 price target. The company will see "better days ahead" due to improving macro conditions for low end consumers, higher pricing, mobile pay and loyalty benefits and a westward expansion.
- Chipotle Mexican Grill, Inc. (NYSE: CMG) ($785 price target) offers "the best combination of growth and returns" in the group especially since a pullback in share prices near an all-time low relative to the industry.
- Panera Bread Co (NASDAQ: PNRA) ($190 price target) continues to make significant investments in the customer experience that could create a "powerful earnings recovery" in the future despite being a "disappointing story" in recent quarters.
- Starbucks Corporation (NASDAQ: SBUX) ($97 price target) could see its rising investment spending derail expectations of continued margin and earnings per share upside.
- Bloomin' Brands Inc (NASDAQ: BLMN) ($25 price target) enters 2015 with strong momentum, but an "elevated" valuation and mixed portfolio performance justifies a neutral stance.
- Noodles & Co (NASDAQ: NDLS) ($18 price target) is a company that is "failing to grow/retain customer interest."
- Zoe's Kitchen Inc (NYSE: ZOES) ($35 price target) is a "quality up-and-coming" fast-casual restaurant but "much is being paid by the market before being proven" and investors should wait for a better entry point.
- Del Frisco's Restaurant Group Inch (NASDAQ: DFRG) ($20 price target) is "one of the cheapest" stocks in the restaurant group but shares still have room to fall.
- McDonald's Corporation (NYSE: MCD) ($99 price target) will see its shares range-bound as "dismal fundamental trends" continue which are partly offset by the stability of the company's business model, high dividend yield and a soon to be announced strategic plan.
- Restaurant Brands International Inc (NYSE: QSR) ($41 price target) needs to clarify its Tim Hortons rollout strategy, particularly given its limited international awareness.
- Darden Restaurants, Inc. (NYSE: DRI) ($62 price target) offers some "intriguing" financial engineering and cost-savings opportunities but with a valuation of over 11x EV/EBITDA, the outcome of these strategies may already be priced in.
- Texas Roadhouse Inc (NASDAQ: TXRH) ($35 price target) is well-positioned to benefit from healthy macro trends and lower gas prices, but these dynamics are "largely" priced in at current levels.
- Buffalo Wild Wings (NASDAQ: BWLD) ($175 price target) shares are poised to underperform due to near all-time high valuations and upcoming earnings headwinds this year.
- Yum! Brands, Inc. (NYSE: YUM) ($74 price target) will see a slower pace of recovery in its China business due to weak macro trends and opening too many new store additions.
- Finally, the analyst's bottom pick is Wendys Co (NASDAQ: WEN) with a $9 price target as current valuation overstates future growth potentials.
Image credit: Chris Potter, Flickr
Latest Ratings for BLMN
|Feb 2017||Credit Suisse||Downgrades||Outperform||Neutral|
|Feb 2017||JP Morgan||Downgrades||Overweight||Neutral|
|Jan 2017||Goldman Sachs||Downgrades||Buy||Neutral|
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