As part of my ongoing research on used equipment, I found that much used restaurant equipment is selling for pennies on the dollar. My thoughts are that this could be a slowdown in the overall economy or that traditional sit down restaurants are giving way to new way of dining out.
To revisit my research, I perused several used equipment auctions sites and found $13,000 ovens going for just a few hundred dollars. These commercial ovens are used in restaurants, hotels, schools and any other place where people dine in mass. Much of this equipment changes hands many times with turnover in the food industry. Players in this space include: Standex (SXI, Financial), Middleby (MIDD, Financial), Illinois Tool Works (ITW, Financial) and Manitowoc Food Services (MFS, Financial). I would not buy stock in any of these companies, regardless of what the factor is that is driving down the value of used equipment.
I found a great article today on CBS about how diners are avoiding traditional restaurants. According to the article, traditional restaurants had 53% share of the market a decade ago. Now, dining establishments without waiting staff have 53%. As an example, diners are avoiding Applebee’s and going to Panera (PNRA, Financial). Domino’s (DPZ, Financial) is doing well with take-out.
Chili’s has experienced a 2.2% drop in revenues at established sites this year. Ruby Tuesday’s has had five straight years of declining sales. I will say one thing in Brinker’s (EAT, Financial) defense: sales, earnings and cash flows have increased over the past three years. Cracker Barrel (CBRL, Financial) has plateaued.
Having said that, there do seem to be many chains that are thriving. BJ’s (BJIR, Financial) has experienced growing sales, earnings and high return on equity. Others thriving include Buffalo Wild Wings (BWLD, Financial), Dave & Buster’s (DAVE, Financial) and Red Robin (RRGB).
Of course, restaurants come and go. Pull out a phone book of your town and go back a few decades. Ninety percent of those establishments are gone. Someone with a newer, fresher idea comes along and bumps out the old guys. That is why restaurant stocks do not make great investments. Once growth is done, it is probably best to sell shares.
So some of these chains are thriving and some are not. In my research, some folks have told me that perhaps the mom and pop places can’t compete and they are the ones who buy used equipment. I suppose a brand new location of Buffalo Wild Wings is going to get brand new everything, though not necessarily. This could explain the drop off in used equipment.
The rules and regulations that a restaurateur faces are onerous: city, county, state, federal, Department of Labor, fire department, liquor laws and health department. It just goes on forever.
So bottom line, stay away from restaurant equipment stocks and stay away from restaurant chains that are not growing sales. You might ride the winners for a while but eventually, they will not be cool to be seen and go the way of so many chains that came before them.
Disclosure: We own none of the stocks mentioned.
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