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Restaurant Stocks a Little Overcooked Now, But Still Tasty

The sector's bullish tide could be a long-lived trend


Impressed by the Dow Jones Industrial Average’s scoot back above 13,000? Yeah, well, it’s a bit of a snooze compared to a whole slew of restaurant stocks like Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA) that not only are unhesitantly marching into new-high territory, but many of which are well into new all-time high territory.

Restaurants? Yeah, restaurants.

The feat begs two questions: (1) Why? (2) Can they keep going?

Frankly, I was expecting my digging to force me to answer with (1) mere hype, and (2) no. However, as it turns out, these stocks are backing up big gains with solid underlying corporate results. Given the sustainable and proven pace of earnings growth, though, I can’t imagine what might trip these stocks up in a meaningful way other than just the sheer weight of recent gains.

Proof of the Pudding

First and foremost, a caveat and disclosure: I can’t stand buying stocks that have hit a string of new 52-week highs.

I know. I’m supposed to “buy new highs.” I just can’t do it. Clearly somewhere along the way in the history of every long-lived stock, the buying spree has stopped and at least some folks who bought into “buy new highs” hype ended up holding the bag. I don’t want to be that guy. For that reason, I still encourage anyone and everyone to wait for a short-term pullback before jumping on board any of these long-term trends. With that out of the way …

In the short run, emotions and marketwide news can push stocks higher and lower. In the long run, though, earnings are all that really matters. Trouble is, the short run’s noise hysteria can obscure the long run’s reality.

To combat that problem, I like to pair my long-term stock charts with corresponding long-term fundamental data like earnings and P/E ratios. Doing so offers me some perspective you just can’t get from the quick-hit media (mostly television) that wants to give you a taste of information when what you need is the whole meal.

Care to guess what I found when I zoomed out to a long-term view of restaurants’ results? Though there were a normal number of exceptions, more than “a lot” of these outfits have been quietly growing the bottom line, even shrugging off the recession as if it didn’t even happen.

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The gold standard within the restaurant world has to be McDonald’s (NYSE:MCD), though it’s an accolade the world’s largest restaurant chain deserves. Though the company took expected earnings hits in early 2003 and late 2007, the bottom line has otherwise been growing — consistently — since mid-2003. Trailing 12-month per-share earnings are at a record level of $5.27, and only expected to get better this year and next.

And MCD shares have responded appropriately, hitting new all-time highs of $102.22 in January coming off its performance as the Dow’s best stock of 2011.

But what about any of the restaurant chains that aren’t the biggest and best in the world? That’s just it — several of these companies have been rolling to record income levels while few were looking.

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The aforementioned (and McDonald’s spinoff) Chipotle Mexican Grill is one of them. While shares are trading at a ridiculous 58.8 times the burrito-maker’s trailing annual earnings, the progress of the bottom line itself is undeniable. CMG shares have just gotten a little ahead of themselves.

The same goes for Panera Bread, which just posted its best four-quarter earnings stretch ever, pushing the stock higher by 38% for the past 12 months. The problem with PNRA? The stock still is trading at a relatively frothy 35.3 times earnings.

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Assuming you’re not looking to pay through the nose but still want to get in on the “new all-time high” action, I suggest Darden Restaurants (NYSE:DRI). This chain — which consists of moderately priced names like Red Lobster, Olive Garden and LongHorn Steakhouse — has managed to overcome the tightened-purse string blues and grow its bottom line just as impressively as McDonald’s or Chipotle have.

While last quarter’s profit of 41 cents per share was the first major year-over-year step backward Darden has taken in a while, it was apt to be the last in a while too. Though the bottom line slumped, the top line was up on a total basis as well as on a same-store-sales basis. It was higher expenses that that bit into the bottom line.

Either way, analysts expect Darden to be more than back on track by the time it reports its next quarterly results. In fact, next quarter’s expected profit of $1.24 per share would be a record-breaker for the company.

Bottom Line

Were it just one company cranking out endless growth, it would be dismissible. When a bunch of them are doing it, though — regardless of the economic environment — those bullish tides that lift an entire industry’s boats tend to be long-lived trends, sometimes lasting for years. While the excitement over new 52-week highs might have poured a little too much fuel on the short-term fire of late, there’s still a bigger reason these stocks were able to hit those highs in the first place.

Take the hint.

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

Article printed from InvestorPlace Media,

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