Goldman Searching For Alpha In Restaurants: Downgrades Shake Shack & Dunkin Brands, Upgrades Panera

In a report published Thursday, Goldman Sachs analyst Karen Holthouse reviewed the fast food/casual restaurant sector, noting the group has outperformed the S&P 500 index year to date, rising 11 percent versus the one percent decline in the overall index. Given the group's strong performance, the analyst re-evaluated the space and "where to best drive alpha from here."

Holthouse downgraded shares of

to Neutral from Buy with an unchanged $55 price target as shares are now trading with a more balanced risk to reward profile. According to Holthouse, Dunkin's expanded K-cup distribution agreement is likely to be profit accretive in 2016 but the Street's consensus estimates already reflect the outcome. In fact, since the company's first quarter 2015 print, the Street's full year comp expectations are up 60 basis points to 2.6 percent and nearing the high end of the company's one to three percent guidance. As such, the company's valuation is "leaving little room for error" as it is near peak levels on an absolute EV/EBTIDA basis. Bottom line, since shares of Dunkin were upgraded in March, the stock has risen more than 20 percent and a $55 price target assumes a one percent downside versus a 19 percent upside for other Buy-rated stocks.

Holthouse downgraded shares of

to Sell from Neutral with an unchanged $37 price target. Holthouse stated that the stock has one of the greatest downside risks among all stocks under her coverage, despite a 35 percent sell of in shares over the past few weeks. The analyst noted that shares are still trading at 70x NTM (next twelve months) EBITDA estimates, "significantly" higher than the group average which skews the risk reward profile negatively. The analyst did however note that company continues to see a long-term unit growth runway as it is only at eight percent of its projected US company capacity. In addition, unlocking long-term comp drivers (such as breakfast) could improve the company's multi-year comp outlook. Bottom line, Holthouse's long-term thesis is unchanged despite the downgrade, but a price target representing a further 29 percent downside in shares justifies a Sell rating.

Holthouse upgraded shares of

to Neutral from Sell with a price target raised to $172 from a previous $158. Holthouse noted she is "incrementally positive" on Panera's near term comp opportunity as the company is now succeeding in "resonating with consumers." As an example, the company saw over 1.1 million views on a recent YouTube commercial versus less than 85,000 views in a 2013 advertising campaign. On the other hand, the company still faces long-term competitive threat from new fast casual concepts and Panera's "2.0" initiative is not a "silver bullet." In fact, the new initiative creates "incremental kitchen complexity" and could create execution challenges. Nevertheless, Panera has shown a willingness to embrace structural and strategic changes (such as re-franchising and adding leverage) to increase shareholder value. As such, incremental re-franchising or leverage announcements should be viewed favorably moving forward.