Shares of Zoe’s Kitchen (ZOES) are rallying in early trading on Friday after an impressive first-quarter earnings beat. It’s just the latest bullish signal in the fast-casual industry, which has been one of the hottest segments of the market over the last year.
Even before Thursday afternoon’s beat, ZOES stock was easily outperforming the broader market, with shares up 13% year-to-date — a healthy premium to the S&P 500’s meager 2% returns.
There’s no denying that ZOES earnings were impressive, but that doesn’t mean its current valuation is entirely warranted. Let’s take a closer look at the numbers to see why.
The Numbers
Zoe’s Kitchen came in ahead of earnings and revenue expectations, with first-quarter revenues soaring to $63 million, an increase of 36% from the same quarter last year. Wall Street was only looking for $61.6 million.
Adjusted earnings per share came in at 4 cents, beating the consensus call for a 1-cent loss.
To top it all off, ZOES saw same-store sales — perhaps the most vital metric in retail — rise 7.7% year-over-year. There’s no denying, that’s just a solid all-around quarter. But forgive me for thinking ZOES stock might still be a touch overvalued; it currently trades at 230 times its 2016 earnings expectations.
Sure, those valuations don’t touch the absurdity we’re seeing nowadays in Shake Shack (SHAK) stock, which boasts a forward price-to-earnings ratio above 500, but that doesn’t mean today’s levels are justified. In what universe are these restaurant chains being valued as if they were pioneers in emerging technologies?
Listen, if you’re really itching for exposure to the food industry in your portfolio, there are much better options. There’s no need to get fancy and chase after high-risk stocks like ZOES. Consider Yum Brands’ (YUM) Pizza Hut, which, unlike ZOES, actually is on the forefront of tech, as strange as that sounds.
This month, Pizza Hut will introduce an Uber-like platform called Pizza Hut Nav, wherein its hungry patrons can track the moves of their delivery drivers in real-time. And that’s not the only digital initiative from pizza chains.Papa John’s (PZZA) is introducing PayShare, which allows users to split bills. Powered by Ebay‘s (EBAY) Venmo, it’s practical and easy.
And compared to ZOES stock, PZZA stock is practical too, trading at a far more reasonable 28 times forward earnings.
Don’t allow yourself to be consumed by the madness of today’s insane fast-casual valuations. Just because ZOES stock has been trumping the market recently doesn’t mean it’s right for your portfolio.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
