Restaurant Stocks: Good, Bad and Ugly

by Alyssa Oursler | October 25, 2012 10:34 am

In the midst of the seemingly never-ending stream of earnings reports, several restaurant stocks also served up third-quarter news. For the most part they blended right in with the rest of the earnings parade. That is, they were subpar to say the least.

Still, a few tasty surprises were tucked away in the rush of reports. Have a look at who dished out delicious numbers … and whose numbers weren’t quite as appetizing.

The Good

Panera‘s (NASDAQ:PNRA[1]) earnings report on Wednesday showed strong demand for its soup and sandwiches last quarter, which kept investors clamoring for the stock also.

Profits for the fast-casual chain soared more than 27% to $46.5 million in Q3, making for earnings per share of $1.24 — 5 cents better than expected. Total sales jumped 17%, while same-stores sales came in at just under 6%, beating estimates.

This kind of success isn’t new for the momentum stock[2], which has run up 20% since January, 46% in the last 12 months and 260% over the last five years. Of course, that also makes the stock a little pricey, trading at 32 times trailing earnings and 23 times forward earnings.

But if you think Panera can keep up its roll, that premium just may be worth it — especially considering that the rest of the restaurant stocks seem to be loafing.

Before we get to the bad news, we can’t forget Yum Brands (NYSE:YUM[3]), which did make some gains a few weeks back. Its earnings jumped 24%[4], thanks largely to strong U.S. sales and despite the slowdown in China.

New offerings at Taco Bell — including the Doritos Loco Taco and the premium “Cantina Line” — led to a 7% improvement in same-store sales and helped YUM to a 9% gain in revenue overall.

Despite both having good news, Panera and Yum have very different outlooks. Panera is working on continuing to build its U.S. presence. It not only opened 17 company-owned stores and 19 franchises in the last quarter alone but is adding more drive-thrus and catering as well.

On the other hand, Yum has its eye on overseas growth. In fact, 86% of its new restaurants are in emerging markets. Recent signs of a soft landing in China, including its promising PMI report yesterday, could further bolster the company’s success in coming months.

Of course, we can’t forget dessert. Cheesecake Factory (NASDAQ:CAKE[5]) also saw slight gains after the bell on Wednesday. Its increase in profits[6] and customer traffic didn’t boost the stock significantly, but the results were still better than most eateries can say.

The Bad

Fast-food competitor McDonald’s (NYSE:MCD[7]) tops the list of not-so-happy restaurant reports. Between the global slowdown and a lack of new offerings in the U.S.[8], the company’s same-store sales growth continued to wane — dropping below 2% for the first time in nine years and already trending negative for the current quarter.

That pushed EPS down to $1.43[9] — 2 cents less than last year and 5 cents below estimates. The good news is that the stock’s 12% drop since January puts it on the value menu. The Golden Arches are trading at only 15 times forward earnings and come with a healthy dividend.

Next up: Chili’s parent company Brinker (NYSE:EAT[10]). On Wednesday, it reported 18% growth in earnings for an adjusted EPS of 37 cents per share, but that was a penny short of analysts’ hopes. Revenue grew only 2%, while same-store sales climbed just under 3% for all restaurants.

The stock’s fall started off slow at first but snowballed to a 10% loss by day’s end. Still, it has gained around 13% so far this year and 32% in the last 12 months while remaining a decent value, priced only 12 times forward earnings.

Plus, it’s been hard at work trying to modernize its restaurants and cut costs. If those efforts pay off, maybe even more customers will flock to try some baby-back, baby-back, baby-back ribs — and shares could regain yesterday’s losses.

The Ugly

Now for the worst of the worst. Buffalo Wild Wings (NASDAQ:BWLD[11]) and Chipotle (NYSE:CMG[12]) had to be watching Panera’s continued momentum with some envy this week. BWLD dropped nearly 11% on Wednesday, after reporting a 5% decline in third-quarter profits. EPS came in it at 57 cents per share, while analysts had been forecasting 61 cents per share.

Chipotle, which reported last Thursday, managed to increase earnings and revenue by just under 20% for each, but it still missed Wall Street’s high expectations and tumbled a rough 27% as a result[13] — a disappointing déjà vu from the quarter prior[14].

Input costs are weighing heavily on both companies’ shoulders. Buffalo Wild Wings saw its profit fall despite 25% growth in sales because high chicken costs ate away at the bottom line. That revenue growth was still short of analyst estimates, too — possibly a result of increased menu prices turning customers away.

Chipotle also raised prices, but only on the West Coast so far. It did express that it may have to raise them across the board in the coming months, thanks to food inflation. Such a reality would further confirm analyst David Einhorn’s theory that Taco Bell’s Cantina Line could steal away Chipotle’s customers[15].

The ugliest thing about these stocks is their hefty price tags. Even after their recent sell-offs, both trade at nearly 30 times trailing earnings and more than 20 times forward earnings. No wonder their reports didn’t leave investors with good tastes in their mouths.

I’d take some soup or cheesecake or even a “bad” burger over a burrito and buffalo wings, too.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

  1. PNRA:
  2. isn’t new for the momentum stock:
  3. YUM:
  4. earnings jumped 24%:
  5. :CAKE:
  6. increase in profits:
  7. MCD:
  8. a lack of new offerings in the U.S.:
  9. EPS down to $1.43:
  10. EAT:
  11. BWLD:
  12. CMG:
  13. tumbled a rough 27% as a result:
  14. the quarter prior:
  15. steal away Chipotle’s customers:

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