The fast-food market glories in a recession, but the gourmet fast-food market is far too young for any such generalizations. With specialty breadmakers, coffee roasters, and make-your-own gourmet meal kit providers all making markets where none existed before, their behavior in these trying economic time is worth our scrutiny. Let's take a look at these five industry leaders, all of which have a real likelihood of doubling in price within the next year due to their reasonable valuations.
- Caribou Coffee Company (CBOU): Trading around $13, this microcap had almost doubled in value since its initial public offering in 2005. Its slow gains but steady gains have begun to appeal to institutional investors who now own more than 55% of the company. But is this stock just waiting to jump? Its earnings per share of 1.68 is higher than that of Starbucks (SBUX) at 1.62; its ten point return on average assets is more than double that of Krispy Kreme Doughnuts (KKD) at 4.53 and Jack In The Box (JACK) at 4.90. Its price to earnings ratio of 8.07 is the lowest in the sector, less than half of McDonald's (MCD) at 18.57 and significantly lower than sector loser Einstein Noah Restaurants (BAGL). With a healthy return on average equity of 16.65, this issue gives all the appearance of being a safe and stable investment in an otherwise struggling economy. Value investors would be well advised to consider this stock as a significant portion of a diversified portfolio.
- Panera Bread Company (PNRA): With a market capitalization of more than $4 billion dollars, PNRA is one of the largest publicly-traded fast-food providers. Since its initial public offering in 1991, it has increased in value over 2000%. But what has otherwise been a steady and commendable incline has, in the last few years, become a roller-coaster. At the beginning of this year it was trading at $95.96 per share; in June it reached $130.28; in August it was at $96.96; and lately it has been only two points off its 52-week high. No investor should use this issue as a stabilizing force in a diversified portfolio. But a value-investor must learn to ignore the whims of Mr. Market and look at fundamentals. Its price to earnings ratio of 30.60 is higher than Yum! Brands (YUM) at 21.85, Carrols Restaurant Group (TAST) at 16.58, and AFC Enterprises (AFCE) at 1711. Its return on average assets, however, is more than twice that of BAGL and three times that of Nathan's Famous (NATH) or JACK. This is a powerful company with unquestionable earning potential, but compared to its competitors it is overvalued. A wise investor would do well to wait until its stock price falls below 100, which its history suggests it is all but guaranteed to do.
- Starbucks (SBUX): Last week's announcement that Starbucks is to acquire Evolution Fresh did nothing to reduce enthusiasm for its common stock. Trading around $42, it is again within striking distance of its 52-week high. Its after-hours announcement that it would be issuing more than $20 million in loans to smaller coffee producers suggests that prices will be rising even further when trading resumes. But this increase in share price has a great effect on its fundaments. Its price to earnings ratio of 27.39 is dwarfed by CBOU at 8.07 and Tim Hortons USA (THI) at 13.24. Its dividend yield per share of $1.54 is less than that of BAGL at $3.28, MCD at $2.96 and YUM at $2.09. Its return on investment, however, is among the highest in the sector at 25.26, more impressive than Chipotle Mexican Grill (CMG) at 19.27, Peet's Coffee and Tea (PEET) at 9.87 and Dunkin Brands (DNKN) at a pithy .92. With its earnings before interest, taxes, depreciation and amortization of 2078 larger than any in the sector besides MCD at 8585, this company is clearly a blue-chip and likely to so remain. Short-term traders would do well to wait for its price to decline, but long-term value investors should know that this is a company which will reward substantive investment.
- Arcos Dorados Holdings (ARCO): Closing around $21 per share puts this issue within two points of its 52-week low and nine points off its year high. Such volatility is hard to accept in a stock whose initial public offering occurred within the last calendar year. With a price to earnings ratio of 41.16, a cautious investor might wonder whether they jumped the gun at making the stock public. But the infusion of working capital it received as a result of the sale of stock will surely be put to good use by this $4.47 billion midcap. Having already offerec a $.06 dividend and boasting a 21.19-point return on average equity, it's no surprise that it attracted the attentions of early investors. Competitors like Morgan's Foods (OTCQB:MRFD), Good Times Restaurants (GTIM) and the Brazil Fast Food Corp (OTCPK:BOBS) cannot hope to match its momentum or market presence; their respective earnings before interest, taxes, depreciation and amortization of 5.05, -.97 and 14.70 are nothing to ARCO at 265.14. An up-and-comer in the industry, six months off its IPO and it's still not too late to get in at the ground floor.
- Yum! Brands (YUM): Trading around $54 per share puts this issue within four points of its 52-week high. This $25 billion company is busily acquiring a greater and greater market share while reducing overhead and operating costs. Its net profit margin of 10.39% is among the best in the sector, with a price to earnings ratio of 21.85 highly competitive to Dominos Pizza (DPZ) at 20.48, giant MCD at 18.57, and SBUX at 27.39. A two-point dividend yield adds safety and dependability which is reflected in the 76% institutional ownership of its securities outstanding. With a magnificent earnings before interest, taxes, depreciation and amortization of 2,320 and an 89% return on average equity, this is the unknighted blue-chip of the sector. Even major investors would do well to take full advantage of this unique opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.