A hidden opportunity in the restaurant sector
Posted
Apr 28 2009, 03:56 PM
by
Louis Navellier
Rating:
Conventional wisdom says that during a recession people will reduce their dining out frequency and opt to eat and entertain at home. Conventional wisdom is often not very prescient. As I said when I revealed my 5 Hot Stocks in Ice-Cold Sectors, there are always opportunities to profit if you know where to look.
While stocks of food companies have been depressed for the better part of the last 18 months, stocks of companies engaged in the restaurant business have been among the best market performers during the same period. Companies in the casual dining business, including Buffalo Wild Wings (BWLD), Chipotle Mexican Grill (CMG), BJ’s (BJRI), Panera, (PNRA), Darden (DRI) and California Pizza Kitchen (CPKI) are all trading near the high for the last 12 months and are continuing to report sales and profits growth in spite of the recession.
Contrast that to most of the major food company stocks, which are currently trading near their lows for the last 52 weeks. Kraft (KFT) at $22.57 is marginally above the low of $20.81. Sara Lee (SLE) is trading at half of the high for the period; General Mills (GIS) is less than 7% above its low; Kellogg (K) and HJ Heinz (HNZ) are 10% above their lows; and Campbell (CPB) is languishing near the low for the stock of $24.03, currently trading at $25.28 compared to a high of $40.83. In fact, the major food companies are repeatedly citing restaurants as the primary reason for declining revenues and profits.
Dine Equity -- The Next Big Restaurant Play
One of the companies in this sector has not had the success of the others during this period. Dine Equity (DIN), the owner and operator of the International House of Pancakes (IHOP) and Applebee’s restaurants, has seen its stock suffer, while competitors’ shares advanced. The company’s first quarter earnings report, however, should provide encouragement for investors looking for a company with excellent upside in this sector.
DIN reported sales and earnings well above analysts’ expectations. Earnings were aided by effective expense management as well as improved sales. Of perhaps even greater significance than improved margins was the retirement of $78.4 million of debt at a discount to face value, which improves the company’s ability to expand and to absorb anticipated declines in same store sales at Applebee’s and static growth at IHOP.
The effectiveness of expense management and the strengthening of the balance sheet at DIN make the stock an attractive opportunity with substantial upside as compared to many of the company’s competitors. The stock is up nearly 12% today at $29.17, but remains well below the high of $53.50 reached last May.
I rate DIN a B, or buy.
At the time of publication, Louis Navellier held positions in Buffalo Wild Wings, Chipotlee Mexican Grill, Panera, Kraft, General Mills, Kellogg, Heinz and Campbell.
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