In the world of IPOs, technology companies — whether cloud technology, biotechnology or 3-D printing technology — often grab the headlines. And, in many cases, for good reason. Names like biotech Stemline Therapeutics (STML), cloud operator Marketo (MKTO) and 3-D printer maker 3D Systems (DDD) all pulled off impressive offerings over the last few years.
Stemline is the most recent; it hit the markets early this year and has already gained 150% from its offer price. Marketo, on the other hand, doubled on its first day of trading alone back in 2011, while 3D Systems has booked a climb of over 260% since coming public.
Well, get ready to be even more impressed … or at least surprised. Restaurant stocks — companies that play in an established and crowded space, as opposed to a growing, sexy one — have also been pumping out eye-popping IPOs of late.
Take a look:
Plus, the above chart just goes from the first day of trading. From the initial offering price, Chuy’s and Bloomin have gained even more: 220% and 136% respectively.
But you know what that means: These stocks sure aren’t on the value menu. Exhibit A is Chuy’s — the self-described “fast growing, value-driven” Tex Mex chain currently operating in the Southeastern and Midwestern U.S.
The Chipotle (CMG) competitor has grown from only 8 units in 2007 to 42 today, and has plans to keep expanding — including dropping locations into five new states this year alone. That’s expected to make for 25% annualized earnings growth over the next five years.
Of course, one could argue such growth is already priced in, considering the company’s current $42 price tag is 47 times forward earnings. Toss in the fact that it’s competing in a Mexican space crowded with names like California Tortilla, Baja Fresh, Chipotle, Uncle Julio’s, Qdoba and countless other hole-in-the wall spots, and it’s easy to jump to the conclusion that the run is overdone.
But that’s the thing with a stock like Chuy’s: Investors piling into it don’t give a damn about value.
The same was true for Chipotle — and remains true years after it’s fallen from being Wall Street’s favorite Mexican food chain. CMG sported a hefty P/E as it climbed out of the recession and began expanding rapidly, exciting investors and sending the stock price from under $60 to nearly $450.
The momentum stock then fell of a cliff last summer, but CMG is still trading for a forward P/E of 30 … and has still been rewarding savvy investors, posting a 30% YTD comeback.
Chuy’s continues to grow sales — nine straight quarters and counting — and make new highs. Even weak fundamentals — like its rich valuation and shaky balance sheet (the company has $11.3 million in assets vs. $13.5 million in liabilities, including a mere $3.1 million in cash vs. $5 million in long-term debt) — may not be enough to slow down this gunner in the near-term.
The story’s a bit different for Bloomin Brands — a company responsible for more than 1,400 restaurants across the country, including Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and more.
Bloomin is also on a nice streak of sales growth, setting it up for solid earnings growth. Next quarter, earnings are expected to pop nearly 63% … and BLMN is on a roll of beating expectations. Plus, Bloomin is touting a forward P/E of 19, compared to projected five-year growth of 17%.
When put up against a name like Chuy’s, that small premium seems minuscule — and BLMN doesn’t feel far off from reasonably priced.
But you can’t compare BLMN to CHUY. Bloomin is close to fairly valued — which implies that investors actually care about its value. With that in mind, the fact that Bloomin is already trading for $2 — or 8% — more than median analyst estimates is just a bit of a red flag.
And while Bloomin Brands plans to add around 30 locations in 2013 and has growth opportunities overseas, it’s hardly the same kind of growth story as a name like Chuy’s — or even as the third winner we’ve yet to mention: Del Frisco.
The operator of steakhouses and American eateries has just over 30 restaurants, giving it much more room for upside. Heck, it could open one new store and achieve the same kind of growth that Bloomin will over the course of the year.
Plus, if you mix a continued economic recovery in with that expansion, you have a recipe for even more upside. Steakhouses are a common destination for folks enjoying a their discretionary cash, along with a perfect spot for business lunches and business trip dinners.
With that in mind, Del Frisco or Chuy’s could both have more room to run as they keep tacking on new locations and exciting investors. Bloomin, on the other hand, might offer a few good choices for a casual Friday dinner, but don’t be surprised if its kitchen stops cooking up outperformance in the near future.
As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.