TURBULENT MARKETS CREATE OPPORTUNITES.
With recession talk in the air, shares of many of the best restaurant stocks have been crushed. When you look at their fundamentals any bad news [if it exists at all] seems to be more than reflected in the current stock prices. I have laid out my reasoning [and conservative target pricing] for some of my favorites right now. Please let me know where you think I am right or wrong on my assumptions.
Some of the companies with extremely tempting menus and valuations include:
Darden Restaurants: [NYSE:DRI] current quote - $35.79 52 week range: $35.56 - $47.60
Darden owns the Olive Garden, Red Lobster, plus the Longhorn and Bugaboo Creek Steakhouse chains in the casual dining arena. Over the past 11 years their EPS have grown from a [split-adjusted] $0.23 in FY 1997 to an estimated $2.80 for the FY ending May 2008. Sales per share grew from $13.82 to around $48.55 over the same period.
Dividends were a nickle/share back in 1997 versus $0.72/share today. Current yield = 2.01%.
Value Line shows Darden's 10-year median P/E at a relatively non-volatile 16X.
Value Line assigns an 'A' financial strength rating and a 95th percentile 'earnings predictabilty' to this high quality name.
At today's price DRI shares trade for just 12.8X FY [ends May 2008] estimates of $2.80 and an incredible 8.2X FY 2009 expectations of $3.17 /share. A return to a more typical 16 multiple on next FY's estimate leads to a target price of $50.72 or + 41.7% within about 18 months plus 3% more from the yield.
Cheesecake Factory: [NDQ:CAKE] current quote: $22.00 52 week range: $21.45 - 29.80
Cheesecake operates 148 of its namesake units plus 11 more upscale Grand Lux Cafes. In the past 10 years EPS have surged from $0.18 [split adjusted] to an estimated $1.08 for CY 2007. Concensus estimate is now $1.31 for 2008. Sales per share kept pace growing from $3.11 in 1997 to around $21.10 in the year wrapping up this month.
Value Line rates CAKE's financial strength 'A' and lists earnsings predictability at 90th percentile.
Cheesecake has commanded a premium P/E in the past due to its high growth profile and good niche in the casual dining segment. Its 10-year median P/E is 32X looking backward but is not likely to repeat that in the near term future. Value Line assumes a 25X multiple going out 3 - 5 years.
Think the slow economy is hurting these guys a lot? Try getting a table at prime time without a wait. This one passes the Peter Lynch 'real life' gut-check test.
At $22 CAKE trades at just 16.8X next year's estimate of $1.31 - the lowest P/E ever for these shares. At 25X that figure the one year target is $32.75 or + 48.8%.
Ruby Tuesday, Inc. [NYSE:RT] today's quote: $12.21 52 week range: $12.16 - $30.80
Ruby Tuesday runs 680 of its flagship restaurants in 28 states. The current FY [ends May 2008] has been a down with EPS expectations of just $1.02 versus a record $1.65 last year. Next FY concensus estimates are for a somewhat improved $1.29 /share.
Over the past 11 years revenues/share increased from $9.25 to $3.20 and EPS from $0.35. Dividends were initiated in 1998 at 2 cents annually and have gtrown to the current rate of $0.50. Management has performed quite well over the long term.
With the shares typically trading at a P/E average of 16X the current depressed price is only 12X the likely trough earnings and 9.5X those expected for the next FY.
Value Line gives RT a 'B' financial strength rating with 85th percentile for earnings predictability.
Ruby Tuesday is working to fix their current problems and is still solidly profitable while paying you 4.1% while you wait for the turnaround. A return to a more normal P/E of even 15X next year's estimate leads to an 18 month target price of $19.35. This is a potential capital gain of 58.5% on top of about 6% in yield over that span.
Is $19.35 an achieveable goal? These shares hit highs of $21.70 - $33 at their peaks in EACH calendar year from 2001 - 2007.
Ruth's Chris Steak House: [NDQ:RUTH] current price: $10.41 52 week range: $10.41 - $23.00
This high-end joint came public in 2005 and was hit [literally] by hurricane Katrina as their headquarters was then in New Orleans. They have since moved their offices to Florida.
Revenues grew from $214 MM in 2005 to $271.5 MM in 2006 and were up 25.4% year-over-year through the 9 months ended September 30th. Earnings per share are estimated at $0.93 for CY 2007 and $1.01 for CY 2008.
Based on those numbers RUTH shares go for just 11.2X and 10.3X 2007 and 2008 earnings versus much higher multples since coming public. In fact, these shares sold for 48X, 24X and 24X EPS in each of the past three years when its shares were 'in favor'.
I expect that sometime in the next 12 - 18 months you'll see at least a 16 mulitple on these shares getting me to a juciy $16.16 minimum price target or plus 55% above the all-time low price right now.
Is $16.16 an aggressive goal? RUTH has actually traded at $23 or higher during each of the past years.
Taking a stake here might be better than eating a steak here.
CBRL Group: [NDQ:CBRL] today's quote: $33.49 52-week range: $31.94 - 50.70
CBRL Group operates 564 Cracker Barrel Old Country Store restaurants/gift shops in 41 states. Their 11 year growth has been steady with FY 1996 EPS of $1.19 climbing to $2.52 in FY 2007 [ended July 31, 2007]. Sales/share picked up from $15.57 to $99.35 during that same period. Dividend growth more than kept pace. Payouts increased from 2 cents per year in 1997 to 72 cents annually today. The current yield of 2.15% is the highest ever.
Value Line gives CBRL a 'B+' financial strength rating and a 90th percentile earnings predictability score.
CBRL's 10-year median P/E has been a relatively steady 16X versus today's 11.4X current FY estimate and 10.1X next FY estimate [ends July 2009].
At 16X next FY's estimate of $3.33 /share I project a target price of $49.95 over the next 18 months-49.1% above Friday's close plus over 3% in dividends. CBRL shares actually traded at highs of $47.90 and $50.70 in 2006 and 2007 making this goal price look very achieveable on record sales and earnings projections for the future.
CBRL has been aggressively buying back shares over the past 9 years. Common shares outstanding have shrunk from 62.48 MM to around 23 MM [including a Dutch tender completed in 2006]. This is a slow motion LBO being done for the benefit of the shareholders rather than a private equity group.
Brinker International: [NYSE:EAT] current price: $20.55 52 week range: $20.53 - 35.70
Brinker, with its cutesy EAT symbol, owns Chili's, Romano's Macaroni Grill plus its TEX-MEX On the Border chain. Long term results have been impressive. FY 1996 saw sales per share of $6.69 and EPS of $0.35 [split adjusted] versus sales of $38.95 and EPS of $1.65 expected for the FY ending June 2008.
Dividends were initiated in 2006 at 6.7 cents/ quarterly and have been twice increased to a $0.44 cent annual rate since then. The current yield = 2.14% the best ever for EAT shareholders.
Brinker gets an 'A' financial strength rating and a top 1% rating for earnings predictablity from Value Line.
FY 2008's EPS will likely be a rare down year at $1.65 [versus $1.76] but the share price more than reflects this. EAT shares were $35.70 last February not today's $20.55 level. Brinker shares are trading at jus 12.5X the current FY estimate and an even lower 9.93X the concensus view of $2.07 for next FY [ends June 2009].
Brinker's 10-year median P/E has been a not too volatile 17X. A return to that 17X valaution on next year's $2.07 estimate brings me to an 18 month target price of $35.19 or + 71.2% from where these shares trade today.
With the price right near 3-year absolute lows and the reasonable goal so high this looks to be a tasty bargain on the 'to go' menu.
If you think investors are unwilling to pay up for restaurant shares look at a few that are not now bargain priced-
McDonalds [NYSE:MCD] 21.3x 2007 estimate
Burgter King Holdings [NYSE:BKC] 22X 2007 estimate
Bob Evans: [NDQ:BOBE] 16.4X FY 2007 estimate [ends April 2008]
Remember back in 2003 when McDonalds had fallen from its 1999 high [of $49.60] to just $12.10 ? Recall how MAD COW disease, obesity suits, cold profits and hot coffee were going to doom the company. Then note how the shares climbed back from $12 to $61+.
The right price and valuation can more than offset all the 'smart money' news that tries to explain the low price rather than recommending purchase when shares are obviously cheap.
With recession talk in the air, shares of many of the best restaurant stocks have been crushed. When you look at their fundamentals any bad news [if it exists at all] seems to be more than reflected in the current stock prices. I have laid out my reasoning [and conservative target pricing] for some of my favorites right now. Please let me know where you think I am right or wrong on my assumptions.
Some of the companies with extremely tempting menus and valuations include:
Darden Restaurants: [NYSE:DRI] current quote - $35.79 52 week range: $35.56 - $47.60
Darden owns the Olive Garden, Red Lobster, plus the Longhorn and Bugaboo Creek Steakhouse chains in the casual dining arena. Over the past 11 years their EPS have grown from a [split-adjusted] $0.23 in FY 1997 to an estimated $2.80 for the FY ending May 2008. Sales per share grew from $13.82 to around $48.55 over the same period.
Dividends were a nickle/share back in 1997 versus $0.72/share today. Current yield = 2.01%.
Value Line shows Darden's 10-year median P/E at a relatively non-volatile 16X.
Value Line assigns an 'A' financial strength rating and a 95th percentile 'earnings predictabilty' to this high quality name.
At today's price DRI shares trade for just 12.8X FY [ends May 2008] estimates of $2.80 and an incredible 8.2X FY 2009 expectations of $3.17 /share. A return to a more typical 16 multiple on next FY's estimate leads to a target price of $50.72 or + 41.7% within about 18 months plus 3% more from the yield.
Cheesecake Factory: [NDQ:CAKE] current quote: $22.00 52 week range: $21.45 - 29.80
Cheesecake operates 148 of its namesake units plus 11 more upscale Grand Lux Cafes. In the past 10 years EPS have surged from $0.18 [split adjusted] to an estimated $1.08 for CY 2007. Concensus estimate is now $1.31 for 2008. Sales per share kept pace growing from $3.11 in 1997 to around $21.10 in the year wrapping up this month.
Value Line rates CAKE's financial strength 'A' and lists earnsings predictability at 90th percentile.
Cheesecake has commanded a premium P/E in the past due to its high growth profile and good niche in the casual dining segment. Its 10-year median P/E is 32X looking backward but is not likely to repeat that in the near term future. Value Line assumes a 25X multiple going out 3 - 5 years.
Think the slow economy is hurting these guys a lot? Try getting a table at prime time without a wait. This one passes the Peter Lynch 'real life' gut-check test.
At $22 CAKE trades at just 16.8X next year's estimate of $1.31 - the lowest P/E ever for these shares. At 25X that figure the one year target is $32.75 or + 48.8%.
Ruby Tuesday, Inc. [NYSE:RT] today's quote: $12.21 52 week range: $12.16 - $30.80
Ruby Tuesday runs 680 of its flagship restaurants in 28 states. The current FY [ends May 2008] has been a down with EPS expectations of just $1.02 versus a record $1.65 last year. Next FY concensus estimates are for a somewhat improved $1.29 /share.
Over the past 11 years revenues/share increased from $9.25 to $3.20 and EPS from $0.35. Dividends were initiated in 1998 at 2 cents annually and have gtrown to the current rate of $0.50. Management has performed quite well over the long term.
With the shares typically trading at a P/E average of 16X the current depressed price is only 12X the likely trough earnings and 9.5X those expected for the next FY.
Value Line gives RT a 'B' financial strength rating with 85th percentile for earnings predictability.
Ruby Tuesday is working to fix their current problems and is still solidly profitable while paying you 4.1% while you wait for the turnaround. A return to a more normal P/E of even 15X next year's estimate leads to an 18 month target price of $19.35. This is a potential capital gain of 58.5% on top of about 6% in yield over that span.
Is $19.35 an achieveable goal? These shares hit highs of $21.70 - $33 at their peaks in EACH calendar year from 2001 - 2007.
Ruth's Chris Steak House: [NDQ:RUTH] current price: $10.41 52 week range: $10.41 - $23.00
This high-end joint came public in 2005 and was hit [literally] by hurricane Katrina as their headquarters was then in New Orleans. They have since moved their offices to Florida.
Revenues grew from $214 MM in 2005 to $271.5 MM in 2006 and were up 25.4% year-over-year through the 9 months ended September 30th. Earnings per share are estimated at $0.93 for CY 2007 and $1.01 for CY 2008.
Based on those numbers RUTH shares go for just 11.2X and 10.3X 2007 and 2008 earnings versus much higher multples since coming public. In fact, these shares sold for 48X, 24X and 24X EPS in each of the past three years when its shares were 'in favor'.
I expect that sometime in the next 12 - 18 months you'll see at least a 16 mulitple on these shares getting me to a juciy $16.16 minimum price target or plus 55% above the all-time low price right now.
Is $16.16 an aggressive goal? RUTH has actually traded at $23 or higher during each of the past years.
Taking a stake here might be better than eating a steak here.
CBRL Group: [NDQ:CBRL] today's quote: $33.49 52-week range: $31.94 - 50.70
CBRL Group operates 564 Cracker Barrel Old Country Store restaurants/gift shops in 41 states. Their 11 year growth has been steady with FY 1996 EPS of $1.19 climbing to $2.52 in FY 2007 [ended July 31, 2007]. Sales/share picked up from $15.57 to $99.35 during that same period. Dividend growth more than kept pace. Payouts increased from 2 cents per year in 1997 to 72 cents annually today. The current yield of 2.15% is the highest ever.
Value Line gives CBRL a 'B+' financial strength rating and a 90th percentile earnings predictability score.
CBRL's 10-year median P/E has been a relatively steady 16X versus today's 11.4X current FY estimate and 10.1X next FY estimate [ends July 2009].
At 16X next FY's estimate of $3.33 /share I project a target price of $49.95 over the next 18 months-49.1% above Friday's close plus over 3% in dividends. CBRL shares actually traded at highs of $47.90 and $50.70 in 2006 and 2007 making this goal price look very achieveable on record sales and earnings projections for the future.
CBRL has been aggressively buying back shares over the past 9 years. Common shares outstanding have shrunk from 62.48 MM to around 23 MM [including a Dutch tender completed in 2006]. This is a slow motion LBO being done for the benefit of the shareholders rather than a private equity group.
Brinker International: [NYSE:EAT] current price: $20.55 52 week range: $20.53 - 35.70
Brinker, with its cutesy EAT symbol, owns Chili's, Romano's Macaroni Grill plus its TEX-MEX On the Border chain. Long term results have been impressive. FY 1996 saw sales per share of $6.69 and EPS of $0.35 [split adjusted] versus sales of $38.95 and EPS of $1.65 expected for the FY ending June 2008.
Dividends were initiated in 2006 at 6.7 cents/ quarterly and have been twice increased to a $0.44 cent annual rate since then. The current yield = 2.14% the best ever for EAT shareholders.
Brinker gets an 'A' financial strength rating and a top 1% rating for earnings predictablity from Value Line.
FY 2008's EPS will likely be a rare down year at $1.65 [versus $1.76] but the share price more than reflects this. EAT shares were $35.70 last February not today's $20.55 level. Brinker shares are trading at jus 12.5X the current FY estimate and an even lower 9.93X the concensus view of $2.07 for next FY [ends June 2009].
Brinker's 10-year median P/E has been a not too volatile 17X. A return to that 17X valaution on next year's $2.07 estimate brings me to an 18 month target price of $35.19 or + 71.2% from where these shares trade today.
With the price right near 3-year absolute lows and the reasonable goal so high this looks to be a tasty bargain on the 'to go' menu.
If you think investors are unwilling to pay up for restaurant shares look at a few that are not now bargain priced-
McDonalds [NYSE:MCD] 21.3x 2007 estimate
Burgter King Holdings [NYSE:BKC] 22X 2007 estimate
Bob Evans: [NDQ:BOBE] 16.4X FY 2007 estimate [ends April 2008]
Remember back in 2003 when McDonalds had fallen from its 1999 high [of $49.60] to just $12.10 ? Recall how MAD COW disease, obesity suits, cold profits and hot coffee were going to doom the company. Then note how the shares climbed back from $12 to $61+.
The right price and valuation can more than offset all the 'smart money' news that tries to explain the low price rather than recommending purchase when shares are obviously cheap.
