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3 Overpriced Restaurant Stocks to Sell

Restaurants stocks like DNKN, PZZA and EAT stock are hitting all-time highs -- and now look far too pricey

By Dan Burrows, InvestorPlace Feature Writer

The bitter cold hitting so much of the country has only added insult to injury in the restaurant industry … and yet, a number of restaurant stocks have busted that trend to hit all-time highs.

DNKN stock, PZZA stock, EAT stockFrigid temps have more people hunkering down at home at a time when restaurants are still trying to get out from under the weak economic recovery. As we noted recently, restaurant chains that cater to average and lower-income consumers have been struggling to get sales. McDonald’s (MCD), for example, has been in a years-long funk, while Darden Restaurants (DRI) is having a hard time luring patrons to Red Lobster and Olive Garden.

Sure, chains that cater to customers with more disposable income are on a tear, such as Starbucks (SBUX) or Chipotle Mexican Grill (CMG), but beyond that, it’s a mixed bag.

So it comes as something of a surprise to find restaurant stocks in sprawling and hardly upscale chains hitting all-time highs this week. From donuts to pizza, here are three restaurant stocks notching personal bests — with dangerously stretched valuations:

Dunkin’ Brands (DNKN)

dunkin-brands-dnkn-stockSome frigid winter weather has been good to Dunkin’ Donuts and its parent Dunkin’ Brands (DNKN). DNKN stock is up 7.1% for the year-to-date and 40% over the last year. True, DNKN is running on some strong numbers, as earnings grew 23% in the most recent quarter on 13% revenue growth. But that’s more than reflected in the DNKN stock price.

DNKN stock has run up to the point that the valuation looks stretched. On a forward earnings basis, Dunkin’ Brands is 10% more expensive than its own five-year average, according to data from Thomson Reuters Stock Reports. DNKN stock is also nearly 40% more pricey than the S&P 500, which doesn’t look all that cheap these days either.

It’s also a bit worrisome that about 6% of the DNKN stock float is sold short. Plenty of folks are betting on a decline, and the rich valuation is making that possibility more likely every day.

Brinker International (EAT)

Brinker-International-EAT-StockBrinker International (EAT), operator of Chili’s and Maggianos Little Italy, has bucked the downtrend in casual dining to scratch out respectable profit and sales growth, but now the stock is starting to look a bit pricey.

EAT stock is up 14% so far this year and 56% over the last 52 weeks. That has EAT stock trading at a whopping 30% premium to its own five-year average by forward price-to-earnings, according to Thomson Reuters Stock Reports. EAT stock also trades at an 11% premium to its five-year average on a trailing earnings basis, and by nearly 5% when looking at price-earnings-to-growth. Price-to-sales figures are also flashing warnings signs, as the current ratio of 17.6 is well above the five-year average of 13.5.

Like DNKN stock, EAT stock has plenty of people betting on a fall, as nearly 5% of the float is sold short.

Papa John’s International (PZZA)

papa-johns-pizza-pzza-stockNoted Papa John’s (PZZA) franchisee Peyton Manning might have embarrassed himself in the Super Bowl, but that did nothing to hurt this pizza slinger. PZZA stock is up 14% for the year-to-date and has roughly doubled in the past year.

Papa John’s enjoyed 9.6% earnings growth in the most recent quarter on a 6.4% gain in revenue, but PZZA stock looks to have gotten far ahead of bottom-line expansion. PZZA has a forward P/E that is now 66% more expensive than its own five-year average, as well as 41% more pricey than the S&P 500. PZZA stock is also expensive on a trailing earnings basis, trading at premiums of 76% and 26% to its five-year average and the broader market, respectively. The PEG is 26% higher than the five-year, while P/S is almost double its own long-term multiple.

Predictably, a significant 3.5% of the PZZA stock float is sold short, up from 3% just two weeks ago. As good as the gains have been, it might be time to lighten up on PZZA stock, and these other red-hot restaurant names, as well.

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

Article printed from InvestorPlace Media,

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