This is a continuation from Part I of this two-part series.
When the economy turns bearish, one of the first luxuries Americans sacrifice is the restaurant-cooked meal. But modern fast-food providers are preparing meals that would have shamed most restaurants of a generation ago. In the wake of Supersize Me! and the popular revulsion against trans fat, drive-through dining continues to become both healthier and more affordable. Here are five restaurant stocks that have a real likelihood of doubling your investment the moment the economy turns around.
- Dunkin' Brands Group Inc. (DNKN): DNKN has now priced its secondary stock offering, adding more than 20 million shares of common stock to its pool. Its recent share price loss is nothing but a reflection of this upcoming share dilution. Its fundamentals remain strong. With more than $3 billion in total market capitalization, DNKN may not be able to hold a candle to Starbucks (SBUX) or McDonald's (MCD) with $33 billion and $97.7 billion respectively. But its return on average equity of 4.99% is very strong in an industry with such major losers as DineEquity (DIN), Ultimate Franchise Systems (UFS) and Jamba (JMBA), with equity returns of -83.49, - 128.46, and the incredible -189-14 respectively. A moderate player in a fast-paced industry often appears slower than it really is. But with neutral earnings per share and a dedicated cashflow, this kind of stability is the best that money can buy.
- Sonic Corporation (SONC): This half-billion-dollar corporation is almost 97% owned by institutional investors, leaving very little doubt about its stability as an investment. Its relatively low beta coefficient of 1.45 shows this to a mathematical certainty. But this kind of stability can be short-lived when institutions, rather than individuals, control the largest blocks of stock: this means that stock tends to be bought and sold in large blocks, leading to major one-day price swings. And indeed this has already happened, with the gap between SONC's 52-week low and high being more than 100%. Its price to earnings ratio of 23.74 is among the highest in its class, with only Chipotle Grill's (CMG) very high 51.43 and Wendy's (WEN) incredible 742.94 being any higher. SONC has difficulty comparing to equivalently-capitalized restaurant holding companies like Einstein Noah Restaurants (BAGL) or AFC Enterprises (AFCE), both of which have more than double its earnings per share. While this company is guaranteed to grow, its stock price has no such guarantees; the long-term investor should be guarded, and the short-term investor very careful indeed.
- Krispy Kreme Doughnuts (KKD): Trading around $7 per share, KKD has been steadily increasing towards its 52-week high reached in mid July. But that is nothing to the strength once attributed to the franchise. The first public issue of KKD stock was at more than $35 per share, and within a year it had reached nearly $50; by mid 2004 it was trading in the single digits, and has yet to recover. It's not surprising, once you look at its fundamentals. Its earnings per share of .26 is nothing to boutique Caribou Coffee (CBOU) at 1.68, and its price to earnings ratio of 28.69 is trumped by competitor Retail Food Group (RFG) at 8.07. It pays no dividend, whereas CBOU yields 5.80 and A Zorbas & Sons (ZRP) yields 2.48. Its return on investment of 5.92 is, though respectable, in the bottom quarter for this sector. While its net profit margin for the third quarter of this year (Jul '11) was a robust 9%, analyst expectations of year-end profits of only 2% do not show that this company is likely to return to past highs any time soon. A fair investment, to be sure, but not one that will make an investor a significant amount of money. A stable hedge, perhaps, for practitioners of Modern Portfolio Theory, but not a worthy target for a true value investor.
- McDonald's Corporation (MCD): With a market capital of nearly one hundred billion dollars, MCD common is one of the most highly-valued stocks in the world. It shows no sign of being any other. Trading at nearly double what it was two years ago and less than a point off its 52-week high, its earnings per share of 5.10 are among the best in its sector. MCD's price to earnings ratio is a third that of competitor eatery CMG. Carrol's Restaurant Group (TAST) has a slightly lower price to earnings ratio, but less than a fifth the return on average assets and no dividend yield at all; Jack In The Box (JACK) has a just over a third the return on average equity and an earnings per share of only 1.20. Yum! Brands (YUM) comes nearest MCD with a dividend yield of 2.09, but has less than half the earnings per share. In harsh economic times, more and more Americans are forced to consider budget dining options such as those offered by McDonald's and its subsidiaries. The stock is more than recession-proof, it flourishes in recession. While its peak value might turn away short-term investors looking for a quick buck, long-term value investors know that the intrinsic value of this company makes it well worth its high strike price.
- P. F. Chang's China Bistro (PFCB): This American mid-cap trades around $30 per share. It still has nearly 20 points, or more than 50% of its current share price to make up before returning to its 52-week high. Many short-term buyers might see this as an opportunity to invest. But do its fundamentals bear out this decision? Its price to earnings ratio of 17.69 is comparable to that of competitors The Cheesecake Factory (CAKE) and Sixx Holdings (SIXX) while maintaining a dividend yield of 3.16 as supposed to their complete lack of dividend. Its earnings per share of 1.79 only half that of Bravo Brio Restaurants (BBRG), but their return on average assets is deep in the negative. With a return on investment of nearly 10 and a 3.81% profit margin expected for 2011, this is an issue that should appeal to even the most safety-conscious investor. Two consecutive quarters of growth will demonstrate that this is a restaurant company capable of surviving the lean times; when the good times return, this is an issue that has nowhere to go but up.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.