Well-run restaurants can deliver many years of supersized returns to investors. But in this highly competitive arena, today's winners can quickly become tomorrow's losers. That's why identifying the strongest companies -- those with long runways for growth and proven business models -- is vital. In this regard, read on to learn about two of the best restaurant stocks available in the market today.
Image source: Zoe's Kitchen.
Zoe's Kitchen (ZOES) is a rapidly expanding chain of fast-casual restaurants. The company has doubled its store count over the last three years to more than 200 locations, and management believes Zoe's can double that number again by 2020. Yet at even those levels, Zoe's will be only about one quarter of the way toward fulfilling its long-term target of more than 1,600 locations in the U.S. alone.
Zoe's concept of serving "fresh, wholesome, Mediterranean-inspired dishes delivered with Southern hospitality" appears to be resonating well with restaurant-goers, as evidenced by its impressive streak of 27 consecutive quarters of positive same-store sales growth. Zoe's traditional cooking techniques (e.g., grilling rather than microwaving) and naturally flavored ingredients are proving popular with patrons -- something I expect will continue since it fits well within the trend toward healthier eating.
Looking ahead, falling unemployment, low gas prices, and potential tax cuts all bode well for the restaurant industry as a whole. Yet despite these near-term catalysts, Zoe's stock has taken some hits in recent months. Wall Street soured on the stock after a somewhat lackluster second-quarter report, and Zoe's shares inexplicably sold off again after its recent ICR XChange presentation. With the company's long-term growth story still intact -- and shares now about 20% cheaper then they were a year ago -- patient investors may wish to consider using the sell-off as an opportunity to nibble on some Zoe's Kitchen stock.
Image source: Burger King.
Carrols Restaurant Group (TAST 0.21%) is the largest franchisee and best-in-class operator of Burger King restaurants. It operates more than 750 Burger King restaurants -- about 10% of all Burger Kings in North America.
Carrols is somewhat of a defensive play in that it benefits when other franchisees struggle. Should an industry-wide slowdown occur, more franchise owners might choose to sell at prices Carrols finds attractive. Carrols can then step in and purchase these businesses, apply its hard-earned best practices to improve and streamline their operations, and reap the cash flow rewards.
Carrols is one of my favorite types of growth stocks. It possesses powerful scale advantages; by leveraging its costs over an ever-expanding number of stores, Carrols is able to generate higher profit margins than smaller franchisees. And with its proven, value-creating acquisition strategy, Carrols is able to use its steadily rising cash flows to consolidate the highly fragmented market of Burger King franchises. It's the biggest fish in a large ocean -- one that should supply a steady diet of future acquisition opportunities in the years ahead. As such, investors who buy shares in Carrols Restaurant Group today should be well rewarded in the years ahead.
