Restaurant Stocks: Some Food For Thought

by: Justin Kuepper

Restaurant stocks have been relatively strong performers over the past month. According to Tickerspy's index, the sector is trading 16.1% higher (12.6% better than the S&P 500) over the past month and 121.3% higher (122.1% better than the S&P 500) over the past year. In this article, we'll take a look at some of the most promising companies in the mix.

Buffalo Wild Wings (BWLD): A Strong, Consistent Growth Play

Buffalo Wild Wings, an owner and franchiser of sports-themed restaurants that primarily serve chicken wings, has long been a Wall Street favorite. The stock is trading up 26.6% this month and 67.2% this year, making it the second best performer in the mix, after takeover target O'Charley's Inc. (NASDAQ:CHUX). Its longer-term performance is even more impressive.

With its 35.7x price-earnings ratio, the stock is slightly more expensive than the industry average of 21.5x and yields a higher-than-desirable PEG ratio of 1.28, according to Yahoo! Finance 5-year estimates. But as a growth play, the company continues to shine. CEO Sally Smith expects to achieve 20% net earnings growth in 2012 with their 900th restaurant opening this year.

Analysts also remain bullish on the name, especially after it reported higher-than-expected financial results last quarter. DA Davidson raised its price target to $105 per share; Stephens and RW Baird both raised their price targets to $100 per share; and, Deutsche Bank raised their price target to $85 per share and maintains a Buy rating on the stock.

Ark Restaurant Corporation (NASDAQ:ARKR): The Choice Pick for Income Investors

Ark Restaurant Corporation, owner of 22 restaurants and bars, 29 fast food concepts and catering operations, is a diversified player that has paid a consistent dividend for several years. At its current share price of just over $16 per share, the stock's dividend yield has surpassed 6%, making this company a solid choice for income investors.

On a growth basis, the stock hasn't done too bad either. The company is trading up 12.2% over the past month and 13.8% over the past year. And its valuation remains roughly in-line with the industry's average multiple at just 20.78x. These factors make it a relatively safe bet for income investors that tend to be relying on the income for retirement.

Of course, no stock is without its risks. Despite its recent swing to profitability and positive cash flows, as well as its consistent dividend track record, the company has some losses in its recent history that could put its dividend yield at risk. Investors should carefully watch the company's fundamental performance to ensure that it's headed on the right track.

Tim Horton's Inc. (THI): An Undervalued Large Cap in the Mix

Tim Horton's Inc., a quick service restaurant chain that offers coffees, wraps, donuts and other goods, is one of the most undervalued plays in the sector given its valuation and growth rates. With a forward price-earnings multiple of 17.32x and a PEG ratio of less than 1.0 (using its most recent growth rates), the company may be an attractive play for value investors.

This valuation could be further unlocked by two shareholder friendly actions announced in late February. First, the company is increasing its dividend by 23.5% to 21 cents, which should attract additional income investors. And second, the company has approved a CAD$200 million buyback that represents about 10% of the company's public float, as of February 20th.

Finally, the company also has significant growth potential, with its only modest entry into the U.S. market to date. Last quarter, the company reported same-store sales growth of 5.5% in Canada and, importantly, 7.2% in the United States. So, despite its $8.5 billion market capitalization, the company may have ample room to grow down the road.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.