Restaurant stocks end year higher on strong finish

This post is part of the On the Margin blog.

Last year was not a good one for restaurant stocks. 

Oh, sure, restaurant stocks finished up 2.8 percent for the year, according to the NRN Restaurant Index, thanks to a bullish finish, as investors put some faith in a 2017 comeback.

But that 2.8 percent was hardly world-beating. Consider this: The S&P 500 Index rose 9.5 percent in 2016. The Russell 2000 index climbed 19.5 percent. And the Dow Jones Industrial Average grew 13.4 percent.

That 2.8 percent was far below average, given investors’ overall bullishness.

But in the stock numbers, we can find some hope for an industry that had a really tough year. Indeed, weakness on Wall Street was to be expected in a year when same-store sales were far below expectations, and traffic was far worse — which led to an awful lot of missed expectations. 

First, there was that finish. The median increase for restaurants in our coverage universe over the final three months of the year was 7.5 percent, which helped stocks recover from what had been an ugly year.

And several stocks had strong years. The best-performing stock of the year was Arcos Dorados Holdings Inc., the big McDonald’s Corp. franchisee based in Buenos Aires, Argentina, whose stock rose 74 percent on improving sales. 

Papa John’s International Inc., Jack in the Box Inc., Biglari Holdings Inc. and Domino’s Pizza Inc. all saw their stock prices increase more than 40 percent on the year.

That said, investors were hard on a number of brands. Ignite Restaurant Group Inc., owner of Joe’s Crab Shack, saw its stock fall 87 percent in 2016. Ignite has perpetually struggled since its initial public offering in 2012. The company’s stock price has fallen by an average of 32 percent a year since the end of 2013, when the stock was $12.50 per share.

Rave Restaurant Group Inc. (down 76 percent), Papa Murphy’s Holdings Inc. (down 63 percent), Bravo Brio Restaurant Group Inc. (down 58 percent) and Noodles & Company (down 58 percent) also struggled in 2016.

Fast-casual restaurant stocks had a particularly tough year as the segment lost luster in the eyes of investors. And it wasn’t just because of problems at Chipotle Mexican Grill Inc., whose stock fell nearly 22 percent on the year. Chipotle’s same-store sales have not recovered from a foodborne illness outbreak in 2015 that kept investors on the sideline.

Only three of the nine publicly traded fast-casual companies increased in value last year, and on average the companies’ stock prices fell by 13 percent. Many companies in the segment reported disappointing sales for much of the year, which turned off investors looking for growth.

Casual-dining operators had a tough year in 2016, but a great fourth quarter. Dine-in restaurants have struggled for years with weak same-store sales, and the past year was no different. Investors responded: The segment’s average stock price fell more than 5.5 percent. 

But that came after a strong fourth-quarter recovery. Casual-dining stocks rose 13 percent in the period, led by strong performance at Dave & Buster’s Entertainment Inc. (up 44 percent) and recovery at chains like Red Robin Gourmet Burgers Inc. (up 26 percent during the quarter, but down 9 percent on the year) and Ruby Tuesday Inc. (up 29 percent in the quarter, but down 41 percent on the year).

Family-dining concepts had a similarly strong quarter, with their stocks rising more than 16 percent on the year, on average. But family-dining companies had the best year of any segment in 2016, rising 17 percent.

Indeed, the eight best performing restaurant stocks in the fourth quarter — Dave & Buster’s Entertainment Inc., Bob Evans Farms Inc., Fogo de Chao Inc., Ruth’s Hospitality Group Inc., Ruby Tuesday Inc., Cracker Barrel Old Country Store Inc., Del Frisco’s Restaurant Group Inc., and Red Robin Gourmet Burgers Inc. — are dine-in concepts.

Investors got back on the quick-service bandwagon. Quick-service stocks increased nearly 12 percent on average, and nearly 17 percent on the year, thanks to the performance of Jack in the Box Inc., as well as Biglari Holdings Inc., the owner of Steak ‘n Shake (up 45 percent) and Del Taco (up 33 percent).

McDonald’s Corp., the biggest restaurant chain in the world, had a decent year in 2016. The company’s 5-percent increase in the fourth quarter helped it finish 2016 on a good note. It was up 3 percent on the year.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

Photos courtesy of Joe's Crab Shack, Chipotle, Red Robin, Ruby Tuesday and McDonald's