3 Overpriced Restaurant Stocks to Sell

by Dan Burrows | February 27, 2014 9:41 am

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 stock[1]Frigid 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[2]. McDonald’s (MCD[3]), for example, has been in a years-long funk, while Darden Restaurants (DRI[4]) 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[5]) or Chipotle Mexican Grill (CMG[6]), 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-stock[7]Some frigid winter weather has been good to Dunkin’ Donuts and its parent Dunkin’ Brands (DNKN[8]). 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[9]), 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[10]) 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.

  1. [Image]: https://investorplace.com/wp-content/uploads/2012/12/burger-king-185.jpg
  2. struggling to get sales: https://investorplace.com/2014/02/mcd-stock-cmg-sbux/
  3. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  4. DRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRI
  5. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  6. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  7. [Image]: https://investorplace.com/wp-content/uploads/2014/02/DunkinBrands185.jpg
  8. DNKN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNKN
  9. EAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=EAT
  10. PZZA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PZZA

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