3 Appetizing Restaurant Stocks: Which is the Tastiest?

Restaurant stocks have done very well in 2013

3 Appetizing Restaurant Stocks: Which is the Tastiest?

Don’t look now, but roadside family-style restaurants are having a bang-up year.

Heck, restaurants in general are doing well, with stocks up 25% year-to-date through Sept. 18 — 190 basis points better than the S&P 500. But some stocks are doing even better than that: Denny’s (DENN), Bob Evans Farms (BOBE) and Cracker Barrel (CBRL) are at or near 52-week highs and doing better than their peers.

Which, if any, should be on your buy list? Here are my thoughts on each.

Denny’s

Only a decade ago, it seemed like Denny’s was on its last legs. However, if you’d invested $10,000 in Denny’s in Sept. 2003, buying at the high of $0.57, you would have $111,228 today, a compound annual growth rate of 27%. The same amount invested in the SPDR S&P 500 (SPY) would only be worth $16,528 or a 5.2% CAGR.

Six years ago, Denny’s moved to a business model that was franchise friendly. Implementing what it called its “Franchise Growth Initiative,” it began to sell company-owned locations to interested operators who would reopen them as franchise locations. Within the first two years it had sold 200 company restaurants to franchisees, using the proceeds to pay down debt.

Its total long-term debt at the end of 2006 was $453 million. At the end of its most recent quarter, that was down to $157 million — a drastic improvement. In 2007, 24% of its locations were company-owned. Today, that’s down to 10%. For comparison, McDonald’s (MCD) owns 19% of its locations and it’s considered to be almost exclusively focused on franchising.

On the downside, Denny’s has shown little consistency when it comes to profits. Second-quarter revenues declined on flat comps, which in turn reduced its operating profit by 34%. The company only managed its two-cent increase in earnings per share because of $8 million in deferred financing costs. Given that the stock’s up 30% year-to-date with no real improvement in its profit picture, I would be hesitant to buy at this point.

Bob Evans Farms

BOBE is up 44% year-to-date through September 18%, and 20% in just the last month alone. Something’s cooking at the Columbus restaurant chain/retail food products company. Its brands resonate with both restaurant and grocery customers, which makes for a very healthy combination.

Back in June I compared Bob Evans and Cracker Barrel. I came to the conclusion that CBRL was the better stock because its business model is less complicated — it’s just a restaurant (with a small retail component) while BOBE has its mitts in several fires. And while I like BOBE’s move to vertically integrate, its Q1 results show some significant growing pains. Both its restaurant and frozen foods businesses experienced reasonably significant declines in operating profits year-over-year.

In addition, same-store sales declined 0.6%. Management insists that its Farm Fresh Refresh restaurant renovations are delivering significantly improved same-store sales over its un-renovated locations. However, investors won’t see the full benefit of these renovations until fiscal 2015.

In the meantime, its stock, which is up quite a bit this year, should take a beating if the $200 million it expects to spend on capital expenditures for renovations this year doesn’t convert into profitable growth. Time will tell, but I’m weary of the next 12 months. It might be wise to wait this out and look to buy once the outcome is more certain.

Cracker Barrel

For the most part, Cracker Barrel’s fourth-quarter report was workmanlike. This was the company’s seventh consecutive quarter of positive comparable store traffic, restaurant sales and retail sales.

Its comparable restaurant sales increased 2.6% while its comparable retail sales were more up a more subdued 1.1%. Its operating income in Q4 increased 9.2% year-over-year when adjusting for 2012’s additional week of sales. On a margin basis the company improved half a percentage point in the quarter to 8.1%.

Moving to the bottom line, its diluted earnings per share on an adjusted basis increased 19% in Q4 and 15% for the entire fiscal 2013. Free cash flow was $135 million this past year enabling it to pay down $125 million in debt, repurchase $3.6 million of its shares and payout $45 million in dividends.

The only fly in the ointment was the company’s outlook for Q1 2014. CEO Sandy Cochran sees EPS between $1.05 and $1.15, considerably less than the analyst estimate of $1.32. Higher commodity costs were partly to blame for the lukewarm outlook. The news knocked its stock for a 2% loss Wednesday, but investors shouldn’t worry. Cracker Barrel still expects full-year operating margins at least 20 basis points higher than in 2013.

Sardar Biglari, CEO of Biglari Holdings (BH), has spent the better part of the last two years badgering Cracker Barrel’s management for seats on its board. Now, Biglari, whose firm owns 20% of CBRL, is seeking a $20 per share special dividend. Although heavy-handed, the request demonstrates why it makes sense to own Cracker Barrel stock. First, it’s clearly a good company or BH wouldn’t own so much of its stock. Second, although its efforts to extract additional profits from its investment in CBRL is nothing more than greenmail, Biglari wouldn’t do that if he thought the move would jeopardize the $500 million in Cracker Barrel shares it owns.

Bottom Line

All three stocks have had a good year. In June, I picked Cracker Barrel over Bob Evans. As far as I’m concerned, not much has changed between the two, and Denny’s has already been on a multi-year run that seems unlikely to continue. The difference-maker here is that potential $20 special dividend. While I don’t agree with Biglari’s methods you can’t ignore the possibility.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/09/three-appetizing-restaurant-stocks-which-is-the-tastiest/.

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