One of our calls for investment themes in 2012 published here on Seeking Alpha was a resurgence in restaurant stocks (click here to read). The article was timely, and since its publication we have seen restaurant stocks benefit from an improving economy - the thesis of our article. We have received earnings from some of the companies, but are especially excited by what Pizza Inn has to say today. The stock was up big Tuesday, getting stronger throughout the day. Let's review the plays from the previous article:
McDonald's (MCD) reported earnings which received a tepid response from Wall Street. They did not blow out earnings estimates, but then again it was not a disappoint either. Simply put, it was in-line with most expectations and some are worried about what the improving economy means for future growth at McDonald's. Since the article on December 21, 2011 the stock has been a market laggard rising a meager 2.11%, however, since our original recommendation on October 11, 2011 (here) the shares have risen a much more respectable 15.72%.
The company has not stumbled yet, and with the economy turning it is our opinion that investors should stick with this stock and see how consumers change their behavior when visiting the 'Golden Arches'. The company still provides a healthy 2.8% yield and has shown no letting up in their strategy of returning cash to shareholders.
Darden Restaurants (DRI) was one of the most hated stocks period when we wrote our article. Many of the talking heads were discussing how the company just did not get today's consumer and needed to make wholesale changes. We think that the next earnings report will prove that the economy was just poor for business at the time and Darden, like all other restaurants, will ride the rising tide.
The company's shares have risen an impressive 11.88% yet still sport an attractive 3.5% dividend. The company is expanding its higher-end casual dining offerings, which should only add fuel to the fire if the economy continues to improve as we have previously speculated. We still believe the shares are a buy ahead of earnings this quarter and through 2012 while playing the economic recovery.
Yum! Brands (YUM) continues to ride growth from their Chinese operations, as their latest earnings report displayed. We liked the company for its strong franchises in the US as well as its growth overseas, and the latest results show that the business in China is growing as the consumer becomes aware of the brand. Yum! saw same store sales in China grow 21%, 3% at the Yum! Restaurants International division and 1% in the US.
Operating profit also was solid increasing 15% in China, 12% at YRI and 10% in the US. With the latest release and the company growing EPS by 14% to turn in its 10th consecutive year of double digit EPS growth, we continue to see upside in the shares. The dividend over the year was increased to $1.14/share, and the company bought back 14.3 million shares at an average price of $51/share.
DineEquity (DIN) has earnings on February 28th according to the earnings calendar we use. The company's shares have risen the most of any of the stocks mentioned in our December 20th article, now up 21.46%. The company has two #1 chains in its portfolio and will continue to deleverage the balance sheet and reinvest in the business through 2012. The company currently has no dividend, however, we do believe that over the next 24-36 months investors should watch for DineEquity to initiate one - most likely in the 1-2% range.
Even though the shares have been strong, we think they are still a play for 2012 as we think the company will have good things to say regarding the new Applebee's concept and improving results moving forward due to a strengthening economy.
The stock which intrigues us the most is Pizza Inn (PZZI), up 14.18% since our previous article with most of those gains coming from trading Tuesday. We own shares, bought shares on February 7th in order to increase exposure before earnings and eagerly await what the company has to say on February 8th. We have tried to get data to create our own numbers, but have been unable to obtain the basic information from the company despite requests. Regardless, our assumptions on the Pie Five concept, when put on paper, point to strong revenue growth quarter-over-quarter and year-over-year. We think that the stock has the potential to rise to $11.50/share as the company rolls out new Pie Five units.
This quarter should be strong, however, due to the timing of the new Pie Five units, some less than 100 days, we think that next quarter will really show the true sales potential of the concept. A few key topics to watch, and one would expect the company to break this out, are the same store sales growth at the Pie Five units quarter over quarter which will tell us if the units are resonating with consumers and actually creating repeat business. Investors also need to know about the plans for future units, and when the company is going to start franchising out the concept to the major markets as they have stated is their goal.
Even if franchising is the path the company decides to embrace, investors need to pay attention to what the company has to say on their credit line and whether they plan to increase it or keep it the same; any increase will indicate expansion plans ahead because cash flow alone will not fund a major rollout. We think investors should buy shares ahead of earnings, and for a play on the Pie Five concept panning out - all of the reviews to date point to the high quality, 5 minute pizza being a hit among consumers.
With more Americans getting back to work, tax refunds starting to find their way back to the taxpayer, and the general economic environment and perception improving we continue to believe that restaurants are one of the 'blue chip' options to play an economic recovery with a bit of added leverage due to the prior poor performance of the industry.
Disclosure: I am long PZZI.