These four stocks represent competitors in the restaurant industry. These stocks have demonstrated investor interest through volume at least 20% greater in the past month compared to volume in the prior month. I this article, I analyze these restaurants based on their potential for growth and value. Despite increased investor interest, these stocks are overvalued on a relative value basis. As a result, these stocks could fall. Here is my actionable analysis:
Texas Roadhouse Inc. (NASDAQ:TXRH) is a service restaurant that operates approximately 350 restaurants in 46 states. Currently, the stocks is trading around $13.5, above its 52 week low of $12.21. The price to earnings ratio of 16.21 is below the industry average of 18.61, but above competitors Brinker International (NYSE:EAT), at 13.88, and Darden Restaurants (NYSE:DRI), at 13.95. However, TXRH has the strongest quarterly revenue growth compared to its competitors, at 9.6%.
Despite these revenue growth figures, the five-year price to earnings growth ratio of 1.08 is above its competitors at .90 for EAT and .98 for DRI. This ratio suggests that the market is putting a premium on TXRH. For the value investor, TXRH does offer a 2.3% dividend yield, which is around the industry average. While this figure is attractive, both competitors offer similar dividends and do so at stronger fundamental positions. EAT has a price to earnings growth ratio of 13.88 and offers a dividend of 2.8%. Likewise, this stock is not a buy, and a better purchase for the value investor would be one of its competitors, EAT or DRI. TXRH could fall 10% to come in line with its competitors' valuations.
The Cheesecake Factory Incorporated (NASDAQ:CAKE), another service restaurant, is currently trading around $26. The price to earnings ratio is 18.64, which is around the industry average of 18.61 and competitor P.F. Changs (NASDAQ:PFCB) at 17.45. The five-year price to earnings growth ratio of 1.14 matches the industry average, but this indicates that the stock is already overvalued. Furthermore, the 2.9% revenue growth is well below the industry average of 8.9%. Additionally, CAKE recently missed its earnings estimates. Lastly, the stock does not offer a dividend.
As a whole, the restaurant industry has not fared well in this volatile market. If the broader restaurant industry begins to recover, there could be potential for the growth investor. As a result, the absence of a dividend and relatively poor financials indicates that the stock is not a buy. CAKE shares are reasonably priced, but, going forward, could fall with the rest of the industry due to the perceived high price of its menu options.
Domino's Pizza Inc. (NYSE:DPZ), one of the most well known quick-service pizza restaurants, outperformed estimates by $0.02 per share through the last earnings period. Currently trading around $32, the stock has seen consistently strong volume of over 1 million shares per day. The stock is trading near its 52 week high of $33. Looking at the fundamentals, the price to earnings ratio of 21.48 is above competitor Papa John’s International (NASDAQ:PZZA) at 17.13 and the industry average of 18.61. An analysis of cash flow reveals a profitable operation with consistent revenue gains over the last three years.
Looking at the chart, the stock has met resistance near the $33 level and support around $31.20. Expect the stock to break upward if it crosses that line. Despite interest in Domino's as it continues to reformulate its ingredients and presentation, competition in fast-order pizza is fierce. To come in line with industry leader Papa John's, shares of Domino's would likely fall 20%-30%.
Jack In The Box Inc. (NASDAQ:JACK), compared to its competitors, is another stock that comes up short. Currently trading around $20, the stock is $0.47 below its 52 week high of $24.51. The stock has seen an average three-month volume averaging 400,000 shares. Shares have a price to earnings ratio of 17.71 from earnings per share of $1.19. JACK does not offer a dividend. The five-year price to earnings growth ratio is 1.14, which matches the industry average of 1.14. It is also below below McDonald's (NYSE:MCD) ratio of 1.78 and Yum! Brands' (NYSE:YUM) ratio of 1.49. Nonetheless, the stock is overvalued by the market. The -0.8% quarterly revenue growth shows that JACK's days of increased earnings will be short because it cannot grow revenues from here.
The company has been repurchasing stock consistently, with management lacking better ways to allocate capital. While there is no guarantee that the company will continue to purchase stock, if it continue to do so there is potential value in the company. However, a safer choice is in MCD, which offers a 3% dividend rate, and, most importantly, offers significant international growth opportunities not shared by JACK. MCD also has posted impressive revenue gains since dipping between Sep 30, 2010 and Mar 31,2011. Likewise, JACK stock is not a buy. It's PEG ratio should be closer to one, which means shares could fall up to 15%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.