Picking stocks isn’t easy, and this year is no exception.
Think about this: Over the past month, the Nation’s Restaurant News Restaurant Stock Index has risen nearly 3 percent, and many restaurant industry stocks are near 52-week highs.
That’s despite myriad concerns heading into 2017 over sales and traffic, which aren’t disappearing. Same-store sales were weak all year, and while that will mean easier comparisons in the coming months, many prognosticators say sales will remain tempered.
There are also rising labor costs to worry about, while food costs won’t fall nearly as much, which could hurt profits.
With stock prices high, companies could easily disappoint investors, which would hurt their valuations.
“I’m not sure anything has really changed,” said Jefferies analyst Andy Barish. “It will be a tough same-store sales year. It’s a very competitive environment. It will be a tough labor year, and a tough margin year overall. Food costs will not be as incrementally helpful.”
The complexity of the restaurant industry landscape led analysts to pick companies that are evolving to fit the times. They’re looking at those that have found the keys to get customers to order food, either through entertainment or technology.
“As a public company, you either evolve and grow your top-line sales, or you have to slash a lot of costs out of your business to get more efficient,” said Peter Saleh, an analyst with BTIG.
Photo courtesy of Panera Bread Co.
Analysts picked Panera Bread Co. as the top name among publicly traded restaurants heading into 2017.
Howard Penney, analyst with Hedgeye Risk Management; Lynne Collier, analyst with Canaccord Genuity; and Stephen Anderson analyst with Maxim Group all listed Panera among their top picks. Saleh also mentioned Panera as a name he likes heading into 2017, but he didn’t make a single stock pick, citing his company’s rules.
Panera’s stock price increased about 10 percent in 2016. Same-store sales have risen thanks in part to its Panera 2.0 initiative, which uses kiosks and apps to improve service and traffic.
“We are increasingly confident in the company’s ability to outperform its peers on the top line as initiatives and technology investments are enhancing the brand’s relevancy with consumers in a rapidly changing landscape,” Collier wrote.
Anderson also cited Panera 2.0, and suggested that it could improve profitability. He cited the company’s new unit growth, weakened competitors and the prospect for share buybacks that could bolster the stock price.
Saleh said Panera has done well with delivery so far, with just a nominal investment.
“It has the potential — between 2.0 and delivery — over time, to drive double-digit same-store sales gains or double-digit gains on average unit volume,” he said.
Piper Jaffray analyst Nicole Miller Regan also named Panera among her top picks for 2017. She says Panera will take the step from recovery to earnings growth this year.
But besides Panera, there was little agreement among analysts as to the top restaurant stocks.
Photo: Mark Davis/Getty images
Barish picked Dave & Buster’s Entertainment Inc., citing the company’s focus on entertainment. Dave & Buster’s gets much of its revenue from its profitable gaming areas, and the company generally beat Wall Street expectations last year.
“It’s a unique, differentiated concept,” Barish said. “The entertainment is a key component to attracting Millennials and differentiating the brand. It has some prime real estate. I still think they have the sales drivers with unique games and entertainment.”
Photo courtesy of Habit Burger Grill
The Habit Restaurants Inc. got some love from Paul Westra, an analyst with Stifel.
Westra sees few strong names right now, and in October he declared the restaurant industry to be in a state of decline. Still, he says fast-casual chains will continue to take share, and noted Habit as one name that could benefit in 2017, given Wall Street’s generally muted response to the company so far.
“We continue to view [Habit] as the poster child of a new species of up-and-coming, quick-casual brands destined to dominate the U.S. restaurant sector,” Westra wrote in November.
Photo courtesy of Starbucks Corp.
Miller Regan said Starbucks Corp. should be a top pick heading into 2017.
Given the challenges in the restaurant environment, she said investors should pay for performance.
“We’re paying up for top performers,” she said.
Starbucks fits that bill. It has a global platform with a number of levers to pull for growth, including new units, improved margins and the use of capital. Also, consumers habitually consume its product, Miller Regan said.
“There’s not another restaurant stock where you go there every day,” she said.
Photo courtesy of The Cheesecake Factory
Another name on Saleh’s list was The Cheesecake Factory Inc., for reasons similar to Panera: Cheesecake has been aggressive in implementing delivery, a potentially strong sales point.
“They can have at least as much success with delivery as Panera is doing,” Saleh said. “Casual-dining traffic has been down every year for the past 10, 11 years. People are going elsewhere. They’re eating at home, or at fast casual. If you can bring food to them, you eliminate one of the reasons people are not eating at [casual dining].”
Photo courtesy of Texas Roadhouse
Another of Anderson’s top picks was Texas Roadhouse Inc. The Louisville, Ky.-based chain “remains one of the higher quality names in this sector,” and stands to benefit from continued declines in beef costs. In addition, Anderson said, the company’s labor costs are lower than its peers.
Photo: Bob Soman
A riskier pick for Anderson is Red Robin Gourmet Burgers Inc. He said the naming of Guy Constant as CFO is “a potential catalyst” heading into 2017, given Constant’s role in the turnaround at Brinker International Inc. while he was CFO at that company. Although Red Robin is a “turnaround story,” Anderson expects the chain to focus more on value, which should generate sales in the coming quarters.
Photo courtesy of Del Taco
The concept Saleh likes most among quick-service chains is Del Taco Restaurants Inc. He thinks the chain’s newer, higher-end items have paired well with its value offers, and have generated strong sales and traffic.
Contact Jonathan Maze at [email protected]
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