5 Restaurants Worth a Bite — and a Buy-in

by Marc Bastow | June 28, 2012 5:30 am

While welcoming our old friend Burger King (NYSE:BKW[1]) back into the publicly traded fold[2], it still bears noting that — along with its main competitors, McDonald’s (NYSE:MCD[3]) and Wendy’s (NASDAQ:WEN[4]) — the King still is just fast food.

Sure, these guys have all made strides to offer healthier menus, and yes, the dining experience generally is better than, say, 10 years ago. But really, you don’t go there for the ambiance. You go because it’s quick and you know what to expect. Still, sometimes we want to actually go out, sit down with the family and enjoy a leisurely meal.

The restaurant business is huge in the U.S. and increasingly overseas. In my state of Maryland alone, restaurant sales are projected at $9.8 billion from the 10,000-plus eating and drinking establishments, with every extra $1 million producing 23 additional jobs, according to National Restaurant Association statistics. Multiply that by the remaining states, and you get an idea of the overall market: ginormous.

So the next time you’re enjoying a sit-down meal with your family, you might want to look around and consider whether that eatery should have a place in your portfolio. But for now, I’ll do some of the legwork for you. Here’s a look at five restaurant stocks worth biting into:

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Cracker Barrel

Cracker Barrel NASDAQ:CBRLYou know Cracker Barrel (NASDAQ:CBRL[6]) by its old-fashioned country store look that starts on the porch lined with rocking chairs and ends at the knickknacks in every nook and cranny of the in-house store.

CBRL got its start in 1969 in Tennessee, and the company runs 604 stores in 42 states, all based on that same country store theme.

Under the hood, Cracker Barrel generated $2.5 billion in sales last year, netting an impressive $86 million, with a return on equity at a solid 28%. Cracker Barrel generates around $190 million in cash flow, which helped to fund a recent 60% increase in the dividend — at 40 cents, CBRL would yield about 2.6% at current prices.

CBRL is trading at an all-time high of around $60, primarily thanks to strong third-quarter results[7] driven by a 3.1% increase in comparable restaurant sales and raising guidance for fiscal 2012 earnings. Yet it’s still not grossly overvalued — Cracker Barrel stock is trading at around 16 times trailing 12-month earnings and about 13 times fiscal 2013 earnings.

A nice company with a nice model, Cracker Barrel offers more than just a sweet cobbler.

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Ruby Tuesday

Ruby Tuesday NYSE:RTThe restaurant with the eponymous name of the 1960s Rolling Stones hit, Ruby Tuesday‘s (NYSE:RT[8]) business has been just as much of a hit since starting out in 1972.

RT operates 750 stores in 39 states, generating $1.32 billion in revenues while earning $19.5 million. Ruby Tuesday’s 3.35% return on equity is not particularly strong, and an expensive private offering of $250 million in 7.625% senior notes will be used to repay revolving debt, mortgage obligations and possibly repurchase common stock.

Presently, RT does not pay a dividend, so investors will have to hope for better future earnings, or perhaps a bump from similar earnings against fewer shares. However, the company is going under a reimaging and will do so under new leadership[9], so Ruby Tuesday has potential, but should be handled with care.

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Buffalo Wild Wings

Buffalo Wild Wings NASDAQ:BWLDBuffalo Wild Wings (NASDAQ:BWLD[10]) serves up its famous wings in 14 original sauces and four original spice combinations — but don’t believe for a second that’s all B-dubs serves up.

Its guests across 835 locations in 48 states can order a wide variety of food, and also can watch just about every sports event on its usually loaded cable or dish system on BWLD’s plethora of screens. BWLD is all about the atmosphere: sporty, but family-oriented.

How is it playing out? Well, BWLD brings about $835 million in revenues for earnings of $54 million, and BWLD already has told analysts it expects to achieve net earnings growth of 20% for fiscal 2012. An 18% return on equity and $151 million in cash flow looks pretty good, too, but that news is even better when you factor in the absence of any long-term debt on the books.

There’s no dividend, but BWLD still looks like a nice long-term play since — let’s face it — everyone loves buffalo wings.

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DineEquity NYSE:DINDineEquity (NYSE:DIN[11]) is focused on two well-known names among the eating-out masses: International House of Pancakes (IHOP) and Applebee’s.

DIN is run on the franchise model — presently, 99% of the 1,842 IHOP restaurants are franchised, as are 75% of Applebee’s 1,535 locations, though DIN is working toward a 100% figure in both by slowly selling off company-owned locations.

DIN takes in $1 billion in revenues and earned $73 million last year. A surprising 48% return on equity is the star number for DIN, as the company actually is fairly heavy in debt, with approximately $300 million of the $1.4 billion coming from financing operations used in the franchise model.

DIN does not provide a dividend, but a share repurchase program put in place by management last year should help future share appreciation, so mull over DineEquity while drenching your short stack in syrup.

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Darden Restaurants

Darden Restaurants NYSE:DRIDarden Restaurants (NYSE:DRI[12]) is the parent company of 1,855 restaurants under familiar names like Red Lobster, Olive Garden and LongHorn Steakhouse.

Bill Darden started the company in 1938 with a small restaurant in Georgia, and over time gobbled up each of the brands, bringing the total number of employees within the company to 180,000. Darden has been in the news recently for a surge in fourth-quarter earnings and a 16% increase in its quarterly dividend. The company currently is working on a turnaround across some of its chains, announcing some changes in its Red Lobster and Olive Garden menus[13] earlier this week.

With revenues of $8 billion and $476 million in earnings, Darden is the giant in the sit-down industry. Indeed, DRI’s $761 million in cash flow dwarfs the competition, and 25% return on equity is top-notch. Throw in a nearly 4% dividend yield and a history of payout boosts, and Darden is perhaps the best investment of the group[14].

Marc Bastow is an Assistant Editor of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. BKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKC
  2. back into the publicly traded fold: https://investorplace.com/2012/06/burger-king-stock-bkw-is-back-without-an-ipo/
  3. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  4. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  5. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  6. CBRL: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBRL
  7. strong third-quarter results: https://investorplace.com/2012/05/cracker-barrel-changes-its-tune-cbrl/
  8. RT: http://studio-5.financialcontent.com/investplace/quote?Symbol=RT
  9. under new leadership: https://investorplace.com/2012/06/ruby-tuesday-ceo-steps-down-after-40-years/
  10. BWLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BWLD
  11. DIN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIN
  12. DRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRI
  13. changes in its Red Lobster and Olive Garden menus: https://investorplace.com/2012/06/olive-garden-red-lobster-to-revamp-menus/
  14. perhaps the best investment of the group: https://investorplace.com/2012/06/investors-should-continue-to-gobble-up-dardens-dri-din/

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