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Restaurants should expect strong 4Q

Restaurants should expect strong 4Q

Analysts project companies to close out the year with increased sales, stock prices

The fourth quarter is typically a strong time for restaurant sales and restaurant stocks, as consumers dine out for holiday celebrations and investors flood the sector.

That trend is likely to continue this year, according to securities analysts who track the industry’s largest restaurant stocks. Expectations are set for increased year-over-year sales as well as a continued surge in stock prices, which have gained steadily through 2010.

“All restaurant subsectors are outperforming the S&P 500 so far this year,” said Sharon Zackfia, an analyst covering consumer companies at William Blair & Co.

She said the stock surge was led by fast-casual and casual-dining stocks, which on average have posted year-to-date gains of more than 80 percent and 30 percent, respectively, as of Nov. 18.

Indeed, through Nov. 23, the NRN Stock Index has seen a 17.5-percent increase for the past three months, besting a 12-percent increase in the S&P 500 Index and a 12.7-percent increase in the Russell 2000 index.

The NRN Stock Index includes all public restaurant companies and is weighted by market capitalization. It closed at 1,643.19 on Nov. 23, down for the day, but near its 52-week high of 1,694.35. The index’s annual low was 1,174.55.

Last week, the NRN Index included at least seven restaurant stocks that hit new 52-week highs or traded very near annual highs, including Chipotle Mexican Grill Inc., The Cheesecake Factory Inc., DineEquity Inc., Panera Bread Co., Texas Roadhouse Inc. and Tim Hortons Inc.

Jeff Bernstein at Barclays Capital in New York said at a recent roundtable presented by the bank that on a quarterly basis the fourth quarter has usually seen the strongest restaurant stock price performance. The sector, on average since 1990, trends up 8 percent and outperforms the S&P 500 Index, he noted.

Bernstein noted that the increased sales trends among nearly all restaurant segments have driven stock performance. In addition, continued cost controls and a leveling of fear on commodity inflation — which is now expected to increase in the low-to-mid single digits — have helped stabilize the industry.

Bernstein forecast an average fourth-quarter same-store sales increase of 3.3 percent, compared with a same-store sales decline of 3.3 percent in the fourth quarter of 2009. Barclay’s coverage includes about 20 restaurant concepts owned by about 14 companies.

“There is strengthening in the consumer environment,” he said during a presentation in New York.

“We remain focused on signs of sequential improvements and are cautiously optimistic such are upon us,” he noted in materials.

Contact Sarah Lockyer at [email protected].

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