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Restaurants To Like And Dislike
Despite the fact that consumers are being cautious with their wallets, the state of many consumers seems to be more pleasant today than it was a couple of years ago. The household savings rate has turned positive after years of negative savings - i.e, borrowing. Further, U.S. households are paying off debt at a more disciplined pace. (For more advice on how to save, check out 3 Simple Steps To Building Wealth.)
TUTORIAL: Budgeting Basics
An Affordable Luxury
Even if times are getting a little easier for U.S. households, concerns - namely high unemployment and continued housing declines - still linger. Gone are the days of conspicuous consumption for most U.S. households. But dining out, although a non-discretionary expense, is a very affordable way for many households to enjoy a break. Many restaurants offer just that - great food at a decent price. For many hardworking Americans, a night free of cooking or a weekend date is a very feasible option even in this economy.
One name that stands out is Darden Restaurants (NYSE:DRI), which owns and operates a diverse selection of names such as Olive Garden, Red Lobster and Longhorn Steakhouse. These restaurants all offer diverse dining options, and their menus are all reasonably priced to cater to all budgets. Darden also owns the upscale Capital Grille concept, which caters to the corporate clientèle. Shares trade for around $53 and a reasonable P/E ratio of about 15.6. The company generates ample cash flow and a 25% return on equity, although it has $1.5 billion in long-term debt versus $1.9 billion in equity. (To help you spend less when eating out, read 8 Tips For Stretching Your Dining-Out Dollars.)
A Diverse Menu
Another diverse restaurant concept is Brinker International (NYSE:EAT), which owns and operates Chili's, a Southwestern Mexican Grill, and Maggiano's, an Italian restaurant. Brinker has a market cap of over $2.2 billion, and over the last three fiscal years the company has generated nearly $300 million in operating cash flow. Shares yield 2.10% and trade for a P/E ratio of about 16. Domino's Pizza (NYSE:DPZ) may still have room to run despite trading at a 52-week high. The company has a new promotion touting a large three-topping pizza for $7.99, a deal that will likely grab attention. Shares trade for 15 times forward earnings, which is not an expensive valuation relative to other concepts. However, DPZ's balance sheet is quite levered with $1.45 billion in net debt against a market cap of $1.6 billion.
Not all restaurants are tasty investments, however. One of my favorite restaurants, Panera Bread (Nasdaq:PNRA), is performing excellently. Restaurants are packing it in thanks to Panera's fresh, affordable menu. But Mr. Market has jumped in on the stock as well, with shares trading close to $131 a pop, or 34 times trailing earnings and 25 times forward earnings. A great business doesn't have to be a great investment, and unfortunately, Panera may fall into this category today.
Bottom Line
Restaurants are not easy businesses to invest in. No restaurant has any real competitive advantage. All have to provide quality food, great customer service and deliver good value to gain consumer loyalty. After that, they are at the mercy of the economy, and today's high gas prices are not helping. But Americans love to dine out, and restaurants that have solid management and can stay tuned into a consumer's needs should do well. (For more on restaurant companies, check out Sinking Your Teeth Into Restaurant Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
TUTORIAL: Budgeting Basics
An Affordable Luxury
Even if times are getting a little easier for U.S. households, concerns - namely high unemployment and continued housing declines - still linger. Gone are the days of conspicuous consumption for most U.S. households. But dining out, although a non-discretionary expense, is a very affordable way for many households to enjoy a break. Many restaurants offer just that - great food at a decent price. For many hardworking Americans, a night free of cooking or a weekend date is a very feasible option even in this economy.
One name that stands out is Darden Restaurants (NYSE:DRI), which owns and operates a diverse selection of names such as Olive Garden, Red Lobster and Longhorn Steakhouse. These restaurants all offer diverse dining options, and their menus are all reasonably priced to cater to all budgets. Darden also owns the upscale Capital Grille concept, which caters to the corporate clientèle. Shares trade for around $53 and a reasonable P/E ratio of about 15.6. The company generates ample cash flow and a 25% return on equity, although it has $1.5 billion in long-term debt versus $1.9 billion in equity. (To help you spend less when eating out, read 8 Tips For Stretching Your Dining-Out Dollars.)
Another diverse restaurant concept is Brinker International (NYSE:EAT), which owns and operates Chili's, a Southwestern Mexican Grill, and Maggiano's, an Italian restaurant. Brinker has a market cap of over $2.2 billion, and over the last three fiscal years the company has generated nearly $300 million in operating cash flow. Shares yield 2.10% and trade for a P/E ratio of about 16. Domino's Pizza (NYSE:DPZ) may still have room to run despite trading at a 52-week high. The company has a new promotion touting a large three-topping pizza for $7.99, a deal that will likely grab attention. Shares trade for 15 times forward earnings, which is not an expensive valuation relative to other concepts. However, DPZ's balance sheet is quite levered with $1.45 billion in net debt against a market cap of $1.6 billion.
Not all restaurants are tasty investments, however. One of my favorite restaurants, Panera Bread (Nasdaq:PNRA), is performing excellently. Restaurants are packing it in thanks to Panera's fresh, affordable menu. But Mr. Market has jumped in on the stock as well, with shares trading close to $131 a pop, or 34 times trailing earnings and 25 times forward earnings. A great business doesn't have to be a great investment, and unfortunately, Panera may fall into this category today.
Bottom Line
Restaurants are not easy businesses to invest in. No restaurant has any real competitive advantage. All have to provide quality food, great customer service and deliver good value to gain consumer loyalty. After that, they are at the mercy of the economy, and today's high gas prices are not helping. But Americans love to dine out, and restaurants that have solid management and can stay tuned into a consumer's needs should do well. (For more on restaurant companies, check out Sinking Your Teeth Into Restaurant Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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