Ranking The Restaurants III

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Includes: BWLD, CAKE, CBRL, CMG, MCD, PLKI, PNRA, PZZA, RRGB, SBUX, SHAK, SONC, YUM, ZOES
by: William Mack, CFA

Summary

This article compares and ranks the 14 restaurant companies on key measures of growth, profits, and valuation.

Industry leaders and laggards are briefly highlighted for each category.

Target prices and buy/sell recommendations assigned for all 14 stocks based on overall risk/reward.

This article uses mostly the same methodologies but over a wider group as my October 2014 article on the industry, "Ranking The Restaurants II".

A. Comparable Sales Growth

Comparable sales (next to average unit volumes) is the most important measure of organic demand growth for the restaurant industry.

The companies in the following chart and table are ranked based on change in comparable sales I expect for each from the 2011-14 period to the 2015-18E period.

Comparable Sales

Nearly every company has already reported its fiscal 2016, so in most cases, the current measurement period includes two forecasted years (2017-18). Similar methodology and time periods are used for the two other operational comparisons that follow.

I expect industry-wide comparable sales from 2015-18E to rise by just over 2%, less than half the rate of growth from the 2011-14 period. Since the prior economic cycle peak in 2007, the typical restaurant grew comparable sales slightly above 3% a year.

Notable Leaders

Cracker Barrel (NASDAQ:CBRL): Its nearly 1% jump for 2015-18E is the biggest four-year CAGR improvement against the 2011-14 period. It is also among the steadiest same-store sales (SSS) growers over the current cycle (post-07), with only one down year (2009's -1.7%). CBRL's best single-year performance came in 2015, spurred by the declines in gas prices. Noting that more than 90% of its system is located within a mile of an interstate, modest ongoing gas prices will remain a comps tailwind.

Panera (NASDAQ:PNRA): Comparable sales staying around very solid 3-4% levels, about double the overall average through 2018, Panera is the only company among the 12 qualifying restaurant to have positive same-store sales since the 2007 cycle peak.

Shake Shack (NYSE:SHAK): At around 6%, same-store sales are likely to represents the estimated group high in the current period, but includes growth likely slowing to 3.5-4.5% in 2017 and 2018, and on a much broader store base.

CAGR

Chg. vs.

CAGR

2015-18E

2011-14

11-14

07-16

McDonald's (NYSE:MCD)

3%

0.9%

2%

4%

Cracker Barrel

2%

0.6%

2%

1%

Shake Shack

6%

0.6%

6%

7%

Cheesecake Factory (NASDAQ:CAKE)

2%

0.0%

2%

1%

Sonic Corp. (NASDAQ:SONC)

2%

0.0%

2%

1%

Panera Bread

3%

-0.4%

4%

4%

Yum Brands (NYSE:YUM)

1%

-0.6%

1%

1%

Papa John's (NASDAQ:PZZA)

4%

-2.0%

6%

4%

Starbucks (NASDAQ:SBUX)

5%

-2.3%

7%

4%

Red Robin (NASDAQ:RRGB)

-1%

-3.6%

3%

0%

Popeyes (NASDAQ:PLKI)

1%

-3.7%

5%

2%

Buffalo Wild Wings (NASDAQ:BWLD)

1%

-4.7%

6%

4%

Zoe's Kitchen (NYSE:ZOES)

3%

-6.2%

10%

7%

Chipotle (NYSE:CMG)

-3%

-14%

10%

5%

Average

2%

-2.5%

5%

3%

Notable Laggards

Chipotle: The only name to show both absolute and relative declines in four-year SSS growth, thanks mostly to the E.coli outbreaks that started in late 2015. My forecasts for growth this year and next, of 2% and 4% respectively, suggest average unit volumes don't approach their 2015 peak before 2018 or possibly 2019.

Zoe's Mediterranean: My flattish forecast for this year (2017) would mark a sharp decline from 2015-16, ZOES' first two full years as a public company.

B. Restaurant Unit Growth

Growth in restaurant unit count is an important organic growth driver. That is especially true of franchise-heavy restaurant operators (e.g., PZZA, SONC), whose royalty-based profit growth is mostly a function of unit counts.

In the 10-plus years since the prior economic cycle's peak in 2007, the restaurants I follow had a 3.3% compound annual growth rate (CAGR).

The overall restaurant industry should grow its unit base by about 4% from 2015-18E. The implied 70 basis point drop from the 2011-14 period is mostly driven by net new openings that should slow progressively from around 5% reported for 2015-16 to just below 4% in 2017-18.

Notable Leaders

Starbucks: Of the 12 names below, unit expansion at Starbucks, seen in the upper-single digits (%) 2015-18E, looks poised to accelerate most markedly from the 2011-14 period, with growth well balanced between US vs. Int'l and owned vs. franchised.

Cheesecake Factory: Late-cycle, international, franchise-driven acceleration, similar to SBUX.

Papa John's: Still the fastest unit grower among large, franchise-focused restaurants from 2015-2018E, despite 2.5% moderation from the heady 2011-14 period.

CAGR

Chg. vs.

CAGR

2015-18E

2011-14

11-14

08-16

SBUX

9%

2.4%

6%

6%

CAKE

6%

1.9%

4%

4%

PLKI

6%

1.2%

5%

4%

MCD

1%

0.9%

3%

2%

CBRL

1%

0.9%

2%

1%

SONC

1%

0.7%

0%

1%

YUM

3%

0.6%

2%

2%

RRGB

2%

-1.3%

3%

4%

PZZA

4%

-2.5%

6%

5%

CMG

10%

-2.7%

13%

14%

PNRA

4%

-2.9%

-3%

6%

BWLD

6%

-4.2%

10%

11%

ZOES

21%

-11%

32%

na

SHAK

30%

nmf

nmf

nmf

Average

4%

-0.7%

6%

5%

Notable Laggards

Buffalo Wild Wings: My estimated 5% growth in restaurants for 2017-18E, though solid, is half the level seen in 2011-14.

Chipotle: Even the much slower 8-9% unit growth I expect in 2017-18 will be difficult to justify if CMG were to fall short of the low-single digit comparable sales recovery I expect over these next two years.

Red Robin: Unit growth takes a new leg down in 2017-18E (at 0-2%/yr.) and will arise from costly company units, as it's likely to continue to shutter 15-20 franchised units annually.

C. Growth In Operating Profit

Change in operating profit is the single best determinant of shareholder returns for restaurant stocks.

Profit growth for the industry over the 2015-18E period should exceed 6%, and much of that growth occurred in 2015-16. Well shy of the 16% yearly expansion from 2011-14, the estimate assumes this EBIT growth falls to 6.1% and 4.8% overall for this year and next.

Notable Leaders

Cheesecake Factory looks poised to enjoy the highest absolute growth in operating profit through 2018, and at 10%, the widest acceleration in the measure from the prior four years. What it lacks in total restaurant count (still only about 215 units globally), CAKE is increasingly making up for through a highly profitable franchising/licensing program that complements the huge AUV ($10.6 million) domestically owned units.

Cracker Barrel's FY 2017 (July), now half over, could mark the cycle high in profit margins (FY17E EBIT of +11.0%), as continued soft traffic begins to dampen its ability to steadily hike menu prices.

Papa John's has among the best long-term records for EBIT growth, thanks to a combination of margins which have doubled in the past 10 years and unit growth that's been above 5% annually for most of the past five years.

Panera has seen relatively robust 8-9% growth for 2017-18.

CAGR

Chg. vs.

CAGR

2015-18E

2011-14

11-14

08-16

CAKE

13%

10%

3%

8%

CBRL

13%

6%

6%

6%

PZZA

12%

4%

8%

14%

YUM

0%

3%

-4%

1%

MCD

1%

-1%

2%

5%

PLKI

9%

-3%

12%

7%

SONC

4%

-5%

9%

0%

SBUX

13%

-8%

21%

26%

PNRA

1%

-11%

12%

13%

BWLD

5%

-19%

25%

21%

RRGB

-4%

nmf

nmf

19%

CMG

nmf

nmf

26%

29%

ZOES

nmf

nmf

nmf

-3%

SHAK

nmf

nmf

na

na

Average

6.2%

-10.0%

11%

11%

Notable Laggards

Buffalo Wild Wings' weak EBIT performance partly reflects high wing costs - its key food commodity - in 2015-16, but also weaker demand for a concept where unit growth, until recently, defied the law of large numbers (similar to CMG). There appears only slight risk of saturation as it approaches 1,500 units (vs. about 1,250 today), but not before 2020.

Red Robin's operating profit margins peaked in the current cycle at only 5.3% in 2015. Negative same-store comparisons and fewer franchised units will put even further pressure on profitability through 2018.

Starbucks' average ticket prices, which have grown steadily 3-4% over the past few years, along with investment in less affluent locales (e.g., China) and coffee costs that revert (higher), will likely cut EBIT growth to around 10%. Still solid when considering the size of SBUX at more than 27,000 stores.

D. Valuation

Valuation is the great neutralizer, potentially making an OK company a great stock and vice-versa. Thus far in 2017, industry-wide valuations have narrowed modestly. Valuations, as with the above fundamental measures, are based on forecasts (2017 EBITDA or EPS here) and compare to periods in which data is actual or reported (2014-16).

For restaurants, a cash flow business in a relatively mature, mostly domestic landscape, EBITDA is the primary basis for valuation and rankings. The stocks in the next chart and table are ranked based on their EV/EBITDA discount on 2017E as compared to 2014-16E. (The table that follows shows both EV/EBITDA and P/E.)

Notable Leaders

Shake Shack is the valuation winner, if surprisingly so. Note, SHAK came public in early 2015, over a year into the comparative period. Though the stock's risen about 70% since that IPO (priced at $21), EBITDA will have grown about 2½ times in just over 2½ years, based on my estimates.

Buffalo Wild Wings' single-digit (9.0x) EV/EBITDA on 2017E, after suffering a 50% drop in multiple since 2014-16, makes it the second cheapest restaurant stock (after RRGB). Versus the industry, BWLD's discount on EBITDA is now 36%, up from 26% in the comparison period.

Starbucks is another established operator that, like BWLD above, is transitioning from a period of very fast growth to one of just relatively fast growth. Its valuations declines - of 14% on EBITDA and 19% on EPS - at least partly reflect these lower growth expectations.

EV / EBITDA

P/E Ratio

Average

2017E vs.

Average

2017E vs.

2017E

2014-16E

2014-16E

2017E

2014-16E

2014-16E

SHAK

13x

27x

-50%

43x

na

na

BWLD

9x

12x

-26%

27x

33x

-17%

SBUX

15x

17x

-14%

24x

30x

-19%

PLKI

15x

18x

-14%

33x

31x

7%

CMG

30x

34x

-13%

nmf

40x

nmf

CAKE

10x

10x

-8%

19x

22x

-13%

RRGB

8x

9x

-7%

24x

20x

18%

SONC

12x

13x

-7%

17x

26x

-34%

CBRL

11x

12x

-7%

18x

22x

-17%

PNRA

12x

13x

-7%

33x

30x

8%

YUM

20x

21x

-4%

25x

31x

-20%

PZZA

16x

16x

0%

25x

30x

-16%

MCD

13x

13x

2%

21x

21x

-3%

Average

14x

16x

-14%

26x

28x

-8%

Notable Laggards

Papa John's is a victim of its own success, as its valuation remains firm. What the company lacks in sustainable earnings surprise-driven multiple upside is partly offset by its lower volatility of growth.

Yum Brands and McDonald's are near recent cycle peak valuations. Only structural (e.g., M&A or much deeper re-franchising) improvements could warrant valuations going sustainably higher, as any operational-based valuation hikes are increasingly scarce.

Cracker Barrel saw a dramatic drop in this year's cost of sales, which may act as headwind in FY18 (July). That, combined with continued declines in traffic into its restaurants, may make CBRL's relatively modestly lower valuation look aggressive.

Target Prices, Recommendations, Final Tally

A final ranking of the stocks based on risk/reward. The target prices I assign are based on a 12-24 month investment horizon. These summary rankings are qualitative, yet based on the fundamental categories discussed in this report.

The four stocks I recommend buying (CAKE, BWLD, SONC, ZOES) offer potential base-case appreciation ranging from 23% to 36%. On this same 12-24 month view, CBRL and RRGB stand out as offering appreciable downside.

Target

Implied

Growth in

Price

App'n

EBIT

rank

SSS

rank

Units

rank

Val'n

rank

CAKE

$81

32%

10%

2

0.0%

5

2%

2

-8%

5

BWLD

213

36%

-19%

9

-4.7%

11

-4%

11

-26%

2

SONC

32

23%

-5%

6

0.0%

4

1%

3

-7%

7

ZOES

24

34%

nmf

nr

-6.2%

12

-11%

12

nmf

nr

SHAK

44

21%

nmf

nr

0.6%

3

nmf

nr

-50%

1

PNRA

266

15%

-11%

8

-0.4%

6

-2.9%

10

-7%

9

SBUX

63

10%

-8%

7

-2.3%

9

2.4%

1

-14%

3

YUM

70

6%

3%

5

-0.6%

7

0.6%

4

-4%

10

PZZA

85

7%

4%

4

-2.0%

8

-2.5%

8

0%

11

MCD

137

6%

14%

1

0.9%

1

-1.6%

7

2%

12

CMG

431

3%

nmf

nr

-13.6%

13

-2.7%

9

-13%

4

CBRL

140

-14%

6%

3

0.6%

2

-0.7%

5

-7%

8

RRGB

36

-23%

nmf

nr

-3.6%

10

-1.3%

6

-7%

6

.

Disclosure: I am/we are long CAKE, ZOES.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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