Some recent price pullbacks have made for some buying opportunities. I have identified some stocks as "Value Priced Restaurants with High Growth Futures." The last few years have been tough for many restaurants as consumers have cut back. However there are some enticing opportunities.
In particular, restaurant chains that are still early on their franchise curve offer a clear, high growth path. Better, in many high growth situations restaurants pile on the debt to keep the growth momentum rolling. However, in today's difficult environment restaurants are generally growing much more thoughtfully and conservatively than years past. I have targeted five growing chains I like. This is based both on looking at their numbers, but also after personal visits to several of their locations. They are Ark Restaurants Corp (ARKR), Buffalo Wild Wings Inc (BWLD), The Cheesecake Factory Incorporated (CAKE), Chipotle Mexican Grill Inc (CMG) and Red Robin Gourmet Burgers Inc. (RRGB).
Ark Restaurants Corp
Ark Restaurants is one of those hidden values you rarely see and that I love. Its main thrust is it actually operates restaurants and catering operations for casinos, hotels and other organizations. From its 3Q earnings announcement:
Ark Restaurants owns and operates 21 restaurants and bars, 22 fast food concepts and catering operations in New York City, Washington, D.C. and Las Vegas, NV. Seven restaurants are located in New York City, three are located in Washington, D.C., seven are located in Las Vegas, Nevada, two are located in Atlantic City, New Jersey, one is located at the Foxwoods Resort Casino in Ledyard, Connecticut and one is located in Boston, Massachusetts. The Las Vegas operations include five restaurants within the New York-New York Hotel & Casino Resort and operation of the hotel's room service, banquet facilities, employee dining room and six food court concepts; one bar within the Venetian Casino Resort, as well as three food court concepts and one restaurant within the Planet Hollywood Resort and Casino.
The tie in to casino operations is important to me. Gaming has been depressed for the last few years but is beginning to show signs of recovery. I believe the economy as a whole will improve in 2013 to 2014 and that should lead to more travel. That will lead to more customers for Ark Restaurants. Their last quarter results are an excellent sign that this may be starting. Again, from their 3Q earnings report:
The Company's income from continuing operations for the three-month period ended June 30, 2012 was $2,923,000, or $0.90per share ($0.89 per diluted share), as compared to $2,580,000, or $0.74per share ( $0.73 per diluted share), for the same three-month period last year.
ARKR's closing price as on 25th October 2012 was $16.88, within a 52-week trading range of $12.91 - $17.05. The company has a quarterly dividend of $0.25 with the annual yield 6.2%.. ARKR's currently trades at a Price to Earnings ratio (PE) of 8.88 with earnings per share (EPS) of $1.92. Company has a current ratio of 1.03. It has profit margin 0f 3.2% and operating margin of 5.7%.
ARKR data by YCharts
Ark restaurants have a very high insider ownership. Nearly 58% of ARKR's common stock outstanding is owned by a combination of insiders and institutional investors, with insiders owning approximately 32% and the remaining 26% by institutions. Companies with high insider ownership tend to have shareholder value high on their goal list.
Buffalo Wild Wings Inc
Many investors no doubt blinked when I put Buffalo Wild Wings when I categorized them as "Value", but I am not crazy. The company franchises and operates restaurants that feature a fun dining concept centered around their New York Style Buffalo Wings and has been the darling of Wall Street in recent years. The company's recent closing price was $74.70, within a 52-week trading range of $58.08 - $94.81, so well down from the year's highs. It gained 54 percent last year and still is up about 12% for this year despite a sharp sell off last week.
BWLD data by YCharts
It currently trades at a Price to Earnings ratio (PE) of 25.0234 with earnings per share of $ 2.99. It also has a current ratio of 1.3 and pays no dividends. It has a profit margin 0f 5.67% and an operating margin of 8.39%.
The selling came from their most recent 3Q earnings report as the company raised prices due to sharply higher costs. Reported on Bloomberg.com:
Company's Chief Executive Officer Sally Smith expects the profit to increase 15 percent in 2012 from the previous estimate of 20 percent. Menu prices have gone up at Buffalo Wild Wings, which faces the highest chicken wing prices in a decade. The company is currently paying $2.07 a pound for chicken wings, up from $1.42 a year ago. Buffalo Wild Wings will open twenty four company owned locations, and twenty franchised locations by the end of the year.
I expect these higher chicken prices will ease but will cause some turmoil in the companies costs and earnings over the next 3-6 months. This provides a great value opportunity for investors.
The Cheesecake Factory Incorporated
The Cheesecake Factory's recent close was $32.76, within a 52-week trading range of $ 25.81 - $36.24. The Company's Board of Directors declared a quarterly cash dividend of $0.12 per share on the Company's common stock. The dividend is payable on November 20, 2012 to shareholders of record at the close of business on November 7, 2012. CAKE currently trades at a Price to Earnings ratio (PE) of 17.09 with earnings per share of $1.93. It has profit margin of 5.83% and operating margin of 8.25%.
CAKE data by YCharts
From its most recent report:
Cheesecake Factory, based in Calabasas Hills, Calif., operates 173 restaurants across the country under its various brands: The Cheesecake Factory, Grand Lux Cafe and one RockSugar Pan Asian Kitchen. In August, it opened a Cheesecake Factory in Dubai and plans to open more restaurants in the Middle East this year. The company also plans to raise its prices next year, but not enough to fully offset food price inflation.
The company takes slow growth to the extreme. It has been around for over 30 years but it has been steadily adding 6-10 locations a year the past few years - definitely not like the fast growers of some others on this list. It is partly that why I like it. Management is never going t o get itself ahead of its finances. Now with its first tentative efforts into international offerings, the future is even better. I love the large portion concept the company uses - go to a Cheesecake factory and I will order the jambalaya and eat off it for that dinner and for two lunches thereafter. I expect Cheesecake Factory to be a long term grower for decades and ideal for long term investors.
Chipotle Mexican Grill Inc
Chipotle no doubt is another eyebrow raiser on my "Value" list, but a recent 3Q report that disappointed the market saw shares fall sharply, providing a buying opportunity. The company's recent closing price was $242.82, within its 52-week trading range of $ 233.820 - $442.40. CWG currently trades at a Price to Earnings ratio (PE) of 28.448 with earnings per share of $8.72. The company has a current ratio of 4.12, indicating lots of cash. It has by far the best margin numbers of this group, with a profit margin of 10.43% and operating margin of 17.24%. It pays no dividends.
CMG data by YCharts
The company has commented on reworking its marketing strategy from a brand building approach to one designed to drive more customer traffic. This is an approach that I applaud. The company is also toying with the idea of drive buy windows and other traditional fast food approaches which I hold reservations. Chipotle targets a clientele wishing a healthier offering than its main competitor Taco Bell of YUM! Brands (YUM). Cloning itself to be simply an upscale Taco Bell would be a bad idea.
While Chipotle is more questionable than the other restaurant companies on this screen I still expect its long term growth to be strong, and the stock price provides a good value.
Red Robin Gourmet Burgers Inc.
Red Robin's recent closing price was $ 28.03, within a 52-week trading range of $ 22.88- $37.98. The company currently trades at a Price to Earnings ratio (PE) of 15.098 with earnings per share of $1.820. The company has a current ratio of 0.70 - the lowest of any company on this screen and indicating the liquidity of the company is too tight. It has profit margin 0f 2.49% and operating margin of 4.20%. The company pays no dividends.
RRGB data by YCharts
There are more than 470 Red Robin restaurants located across the United States and Canada, including corporate-owned locations and those operating under franchise agreements, as well as five Red Robin's Burger Works restaurants. The company is expecting to roll out 13 to 15 restaurants during 2012. Most of the company's restaurants are located in California, Colorado, North Carolina, Ohio, Virginia, and Washington and 50% of its targeted restaurants in 2012 are expected to open in these states.
Red Robin tends to fly under the radar, doing little advertising, so it is often over looked by investors. The liquidity situation is a return but it continues to operate profitably and has lots of room throughout the United States and Canada to continue to grow.