Using Ratios To Identify Stocks Set To Outperform Their Peers: Restaurant Rankings

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Includes: BJRI, CAKE, CBRL, DRI, TXRH
by: Stock Scrutiny
Summary

Introducing the electric utility industry to my research project.

Included are the stocks' rankings in debt, profitability, efficiency, and growth categories.

Weighting of each category is presented, as well as.

Intro

My next article in this series looks to add the restaurant industry to my research. Any new readers that wish to see a detailed explanation on how I arrive at these results, please see my introductory article that elaborates on my process. As a quick summary, I believe that over the long run, stocks that rank higher than their competitors financially (according to my assortment of ratios) will outperform stocks that have a lower ranking in that same industry. Ratios have their shortcomings, but if utilized properly, they can be helpful in analyzing a company's current financial position.

Included in this analysis is Cheesecake Factory (CAKE), BJ's Restaurants (BJRI), Darden Restaurants (DRI), Texas Roadhouse (TXRH), and Cracker Barrel (CBRL). Pricing data is gathered from Nasdaq, while scores were calculated using financial statements from E-Trade.

Ratio Research

Debt

Company Name Total Debt/ Total Equity Quick Ratio Current Ratio Defense Interval Current Liquidity Ratio EBIT/ Interest Expense
Cheesecake Factory 21.6% 0.38 0.47 4.8 488.5 20.81
BJ's Restaurants 30.7% 0.45 0.52 10.7 332.8 12.94
Darden Restaurants 45.8% 0.46 0.61 23.8 292.8 14.71
Texas Roadhouse 0.2% 0.85 0.90 36.3 181.0 301.91
Cracker Barrel Old Cntry 68.8% 0.41 0.84 16.1 276.0 15.81

Current Debt Scores

1. Texas Roadhouse- 1

2. Darden Restaurants- 3

3. Cracker Barrel- 3.17

4. BJ's Restaurants- 3.83

5. Cheesecake Factory- 4

Profitability

EBIT Margin Gross Margin Net Margin Return on Assets Net Income per Employee Effective Tax Rate
Cheesecake Factory 6.3% 13.0% 4.2% 7.3% 2,559.0 7.8
BJ's Restaurants 5.7% 11.1% 4.5% 7.4% 2,287.2 2.3
Darden Restaurants 9.7% 17.6% 8.4% 12.0% 3,884.3 8.1
Texas Roadhouse 8.5% 14.0% 6.4% 11.1% 2,438.0 12.9
Cracker Barrel Old Cntry 9.7% 14.4% 8.2% 16.0% 3,392.1 11.1

Current Profitability Scores

1. Darden Restaurants- 1.5

2. Cracker Barrel- 2

3. Texas Roadhouse- 3.5

4. Cheesecake Factory- 3.83

5. BJ's Restaurants- 4

Efficiency

Sales per Employee Return on Equity Capital Expenditure Ratio Employee Cost Per Unit of Revenue Total Asset Turnover Return on Invested Capital
Cheesecake Factory 0.06 16.7% 22.0 0.43 1.72 13.9%
BJ's Restaurants 0.05 17.9% 18.3 0.27 1.62 12.3%
Darden Restaurants 0.05 31.3% 17.8 0.08 1.42 21.2%
Texas Roadhouse 0.04 17.7% 15.8 0.41 1.73 17.2%
Cracker Barrel Old Cntry 0.04 44.0% 19.9 0.4 1.96 25.7%

Current Efficiency Scores

1. Cracker Barrel- 2

2. Darden Restaurants- 2.67

3. Cheesecake Factory- 3.17

3. BJ's Restaurants- 3.17

5. Texas Roadhouse- 3.67

Growth

Free Cash Flow Growth Revenue Growth Total Debt Growth EPS Growth Change in Working Capital Growth
Cheesecake Factory 131.2 11.0 40.1 -6.8 1,748.3
BJ's Restaurants 74.8 21.5 -5.5 36.1 -81.5
Darden Restaurants 38.8 22.7 94.4 96.2 58.4
Texas Roadhouse 261.5 36.0 -91.9 60.5 21.7
Cracker Barrel Old Cntry -26.7 6.6 0.0 50.8 -112.1

Current Growth Scores

1. Texas Roadhouse- 1.6

2. Darden Restaurants- 2.8

3. Cheesecake Factory- 3.2

3. BJ's Restaurants- 3.3

5. Cracker Barrel- 4.2

Weighting

After implementing performance-based weighting to each category, I have determined that the profitability ratios are most correlated to price performance, followed by efficiency, debt, and growth. Therefore, instead of the equation for finding the cumulative score of a stock looking like this:

(Debt Score x .25) + (Profitability Score x .25) + (Efficiency Score x .25) + (Growth Score x .25) = Final Score

... it now looks like this:

(Debt Score x .20) + (Profitability Score x .33) + (Efficiency Score x .28) + (Growth Score x .19) = Final Score

With this weighting, more value is given to categories with the greatest correlation to price performance, which, in turn, should lead to more accurate final scores. To answer any lingering questions about how I determine weighting, please see my article that introduces the concept. Here are the most recent weight-adjusted scores for the restaurant industry:

1. Darden Restaurants- 2.37

2. Cracker Barrel- 2.65

3. Texas Roadhouse- 2.69

4. Cheesecake Factory- 3.56

5. BJ's Restaurants- 3.58

Adjusting For Share Buybacks

In my most recent article, I introduced how share repurchases can influence share price, and thus, why my future analyses will attempt to account for companies' strategies in this area. For more details on how I determine these upcoming weights, please see the article that explains its implementation. In short, I standardize each company's rate of common shares outstanding reduction to have an effect of between -.1 and .1, with the stock that retires the greatest percentage of its shares to receive the .1 improvement in its score and so on. Here is a table showing the data:

Share Repurchase Rate Effect on Score
Cheesecake Factory 6 -0.1
BJ's Restaurants 5.7 -0.091891892
Darden Restaurants 1.8 0.013513514
Texas Roadhouse -1.4 0.1
Cracker Barrel Old Cntry -0.2 0.067567568

Complete Scores

1. Darden Restaurants- 2.39

2. Cracker Barrel- 2.72

3. Texas Roadhouse- 2.79

4. Cheesecake Factory- 3.46

5. BJ's Restaurants- 3.49

On the back of its stellar performance across all four categories, Darden claimed the top spot among the five restaurant stocks in this analysis. Most impressive was the profitability score of 1.5, which when coupled with the higher weight given to the category, led to a very meaningful impact on its complete score. Its less intriguing buyback rate only marginally hurt its score, leaving a pretty large gap between Darden and the rest of its competitors.

In second place was Cracker Barrel, whose score of 2.72 managed to edge out Texas Roadhouse's score of 2.79. Cracker Barrel had dismal growth metrics, which dimmed any chances it had at competing with Darden for the top spot. Profitability and Efficiency seemed to be no issue for the company, with those strong scores dampening the effect of the previously mentioned growth numbers. Even after scoring the rare 1 (perfect score) in the debt category, Texas Roadhouse only managed to obtain third place. Despite their seemingly strong leverage situation, profitability and efficiency shortcomings were enough to be a drag on the final score. Additionally, it had the lowest buyback rate of the group, thus penalizing its score by .1.

Moving over half a point down the ladder and in fourth place was Cheesecake Factory. They posted below-average scores in all four categories, with help only coming from their strong buyback rate. Just behind them and rounding out the list is BJ's Restaurants. Similar to Cheesecake Factory, this stock didn't do very well in any category besides when accounting for share repurchase rate. With a couple of the scores in this particular analysis, it will be interesting to see how the rankings shake up in future years' analyses.

Conclusion

Ratios certainly aren't the be all and end all, but I'm a firm believer this type of strategy can serve as a useful supplement for investors conducting a holistic analysis. Since this is the first year I ranked restaurants, the scores are just a snapshot in time of their respective financial strengths and weaknesses. Where the real value will be drawn is when multiple years of scores can be analyzed for trends or patterns.

Feel free to leave any feedback or suggestions in the comment section, and if you wish to see future articles ranking different industries as well as statistical breakdowns of historical scores and their relation to price, click the orange follow button at the top of the page.

Also readers are welcome to suggest industries for me to add into my research. Any suggestions will be put into a written article within the next couple weeks!

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