Consumer timidity, margin pressures and a tough global economy are posing huge hurdles for restaurant companies in 2013. But that doesn’t mean there won’t be some winners.
At the ICR XChange, an annual gathering of the investment community and public and private companies held in January, analysts shared their views on the road ahead and the restaurant stocks they expect will be the best-performing by year’s end.
“An investor who purchased the entire recommended list for 2012 would have achieved an impressive 19.6-percent return for the year,” said Tom Ryan, chief executive of ICR, a financial communications firm based in Norwalk, Conn.
Here are the analysts’ edited predictions for 2013:
Senior research associate, Raymond James & Associates Inc.
Prediction: “We think it’s going to be more of the same, unfortunately. … Kind of challenging to the top line, as everyone’s talked about. And obviously everyone is talking about 3-percent to 5-percent commodity inflation. There are some companies that are less exposed to that — folks with seafood exposure, for instance. But I think it’s going to be a bit of a challenging year.”
Stock pick: Red Robin Gourmet Burgers. “The company had a tough couple of years before a new management team came in. … Management has done a great job securing and improving the profitability of the existing asset base, and now they’re turning to some initiatives to broaden the menu in terms of price points, and they’re starting to work on the marketing and brand positioning side.”
A tale of two halves
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Managing director and senior research analyst, Cowen Group Inc.
Prediction: “It’s going to be kind of a tale of two halves. I think we’re very cautious and bearish for the first half of the year. [In] February you’re going to see some extreme volatility and softness. … March should be blue skies and more normal comparisons. As the trends come in the next eight, 10 weeks, I think it’ll scare people that we are in a very sort of secular soft patch here. But I think that turns around relatively quickly. … [After] the spring scare, I think a strong dollar will pop the commodities, and I think the consumer will come back in the second half of the year.”
Stock pick: Del Frisco’s Restaurant Group. “Polished casual is going to be the place to be. I think aging baby boomers want an environment more than they wanted it 15 years ago, and environment-forward concepts are going to win in the long term. And Del Frisco’s Grille, they have the management team, I think, to … start pumping out one a quarter. And I think you’re going to see that for a long time.”
Managing director and senior equity research analyst, Jefferies Group Inc.
Prediction: “I’ll go with a company. Outback [Steakhouse] is a part of Bloomin’ Brands and will continue to put up some of the best same-store sales in casual dining. I just think they have a ton of levers and drivers in play, so I’ll kind of do that as a prediction. It’s not my top pick.”
Stock pick: Bravo Brio Restaurant Group. “It’s just kind of gotten thrown in the trash heap a little bit here with the mature casual-dining names, and it’s by no means a mature casual-dining company. These folks only have 100 units, and they’re still building very productive restaurants. So any sense that the comps are going from slightly negative to slightly positive there I think will have a nice positive move for that stock, and then the investors will be able to refocus on the unit growth opportunity, which remains great.”
Nicole Miller Regan
Managing director and senior research analyst, Piper Jaffray & Co., winner of 2012’s stock-pick competition with Sonic Corp., which rose 54.7 percent in 2012.
Prediction: “We’re rolling with, thematically, ‘The Year of the Restaurant’ the second quarter, so some more to come in our research.”
Stock pick: Burger King. “It’s an improving comp story, accelerating unit growth, accelerating EBITDA, and so the multiple is going to go up. ... It’s a very contrarian call.”
QSR to keep growing
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Vice president and research analyst, Stephens Inc.
Prediction: “The next five years QSR, quick service in general, continues to take share from casual. I don’t think that’s too bold, but I think it’s just [going to] continue to happen.”
Stock pick: Krispy Kreme. “It’s one that’s been off the radar, I think, for a lot of people for five years or so. And now I think this management team has things going in the right direction, so it’s an undervalued growth model.”
Director and senior research analyst, Barclays Capital Inc.
Prediction: “2013 is probably a tale of first half/second half. I would think in the first half of the year people still will be a little bit more skittish. They’ll go for the more defensive, primarily franchise quick-service category. And I think as we move through the year, with expectations for a modest improvement in the macro [environment], you’ll see people shift to the more discretionary, more company-operated, perhaps, casual-dining segment.”
Stock pick: Brinker International. “I believe, with their core Chili’s brand, [Brinker] still has tremendous visibility from a margin expansion perspective, and at the same time they’re still delivering comps above the peer group and trading at a pretty compelling valuation.”
Director and senior analyst, Lazard Capital Markets
Prediction: “I think it’s going to be a big IPO market. I think when you look at the presentations that we heard, the bifurcation between the returns and the comp growth of some of these brands and square-footage growth opportunity — new-store returns compared to what’s out there in the public market — it’s too wide to be ignored. So I think you will see really good IPOs in that context.”
Stock pick: Ignite Restaurant Group. “The addition of Mike Dixon was a very strong hire, and it reminds me of BJ’s [Restaurants] … to a certain extent as far as a lot of white space for regional growth. [He’s a] great addition to the management team at a key, critical growth time, and there’s a lot of opportunity to drive the comp. They’re just at the early stages of marketing and expanding into the more traditional casual-dining usage rather than the big party usage.”
The higher-end consumer
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Managing director and senior restaurant and leisure analyst, Citigroup Inc.
Prediction: “I think the higher-end consumer is going to hold up well. That’s going to help smaller-ticket items such as organic food. It’s also going to help Starbucks. I also cover leisure, big-ticket items, so in a sluggish economy they may not buy a Harley, but they might buy a $4 cappuccino at Starbucks.”
Stock pick: Starbucks. “I think they’re going to continue the comp momentum in 2013. And they have a lot of different growth drivers, as well as international [business], that should help them for the next few years, actually.”
Director of equity research, Credit Suisse Group AG
Prediction: “I think McDonald’s and its franchisees reassert their share gains in the domestic burger QSR segment on pricing leadership, new product innovation and significant push on entry-level value.”
Stock pick: Panera. “Matthew took Ignite already from me. My second was going to be Starbucks, which was just taken, as well. So for the sake of keeping this interesting for the contest, Panera.” Earlier during the panel discussion, Panera was applauded for its strength across dayparts and its ability to create new product news in all of those dayparts.
Associate director of research and senior research analyst, Robert W. Baird & Co. Inc.
Prediction: “We think that the demand environment is going to hold up maybe better than some might be fearing now. There’s a lot of macroeconomic variables that are trending in the right direction, including the housing market, which we think is a big swing factor and could offset some of the drags on the spending environment, such as taxes and austerity measures.”
Stock pick: Chipotle Mexican Grill. “So within that framework, we still like the fast-casual space quite a bit, and we’ll pick Chipotle.”