Price Targets, Ratings Update On Fast/Casual Dining Companies

 |  Includes: BAGL, DPZ, JACK, MCD, SONC, WEN
by: David Ristau

Our EquityAnalytics department is always updating price targets and ratings on companies that we cover based on new information. Our price targets and ratings are thoroughly researched and use financial analysis tools to determine stock prices. Today we are updating the following companies from our coverage Einstein Noah (BAGL), Domino's Pizza (DPZ), Jack in the Box (JACK), McDonald's (MCD), Sonic (SONC), and Wendy's (WEN).

The chart below shows new ratings, price targets, and buy/sell ranges vs. old ones:

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Einstein Noah: Upgrade from Sell to Hold, Increase PT From $12.50 To $14

Valuation is looking pretty fair on Einstein Noah Group, parent company of Einstein's Bagels. The company has a fairly low-growth model but great yield with 3.4% dividend. The stock is an income stock, and we do not see an ability for the company to become much of a growth stock at any point. The company has a fairly low debt load and low capex, but we only see about 75% operating income growth in next four years, and we believe that is a more aggressive model for the company. With an 18.5 PE, we see the company as pretty fair valued and possibly a bit overvalued given the low growth model. It has seen margins drop a bit here as costs have risen, which is something to watch.

Domino's Pizza: Maintain At Hold, Increase PT from $32.50 to $37

Domino's Pizza has seen a nice growth increase as it has improved menu offerings, launched a successful campaign, and has a dedicated management that appeals to consumers. With that said, we still believe the pizza market is a low moat industry that has limited growth. The company has solid growth potential in emerging markets, but we see that model as very much priced into the current stock price. Further, we worry that much of the success of the company has been marketing only. We worry that much of the company's upside and success is now priced in, but we do like the company on a dip. Be careful here as pizza is impossible to create much of an economic moat.

Jack in the Box: Maintain At Hold, Maintain PT at $24

No changes in Jack in the Box for us. Recent results have been in line. Company still trying to make a turnaround.

McDonald's: Maintain at Hold, Increase PT From $110 to $113

We continue to believe that MCD is one of the best holdings in the industry. The company offers a great dividend, continues to grow with limited downside, and it has the most solid brand name in the industry. The margins are probably not sustainable in growth, which may give the company some short-term weakness or limited upside. Yet, we continue to believe that investing in this company is investing in the widest economic moat in the fast/casual dining industry. The company has amazing scale advantages and international growth opportunities. We believe a dip to the low-90s is a great place to get involved, but we would be adding to a portfolio, if you don't own any, at anything below $100.

Sonic: Maintain at Buy, Decrease PT From $10.50 to $9

We would maintain Sonic at a Buy right now on a valuation play. The future PE is solid at 11, and we think that the company has some solid upside. The latest earnings were pretty solid and in line with our expectations. The company had very solid year-over-year same-store sales growth that has not been seen for the company for some time. Additionally, we like the enfranchisement plan that the company is undertaking. Additionally, food costs were down for the company. We brought our targets down slightly for the rest of the year as the company's outlook is a little bit below our expectations. Additionally, the tax rate increased for the company, which decreased equity value.

Wendy's: Downgrade from Buy to Hold, Decrease PT from $7 to $5

We were a little over the top on our expectations for Wendy's this year, and the turnaround for the company is going to take longer than we expected. The company has taken on some different business ideas that we believe are attractive like the "bar bell" pricing model that the company is operating as well as remodeling stores to compete more with quick service restaurants. We believe that while the company operates literally no economic moat, transferring to this model will really help the company in the future. At this time, though, growth is cloudy in the near term, and we are not expecting to see solid same-store sale comps improve until later this year.

Disclosure: I am long MCD