Five Tasty Stocks

I can't be the only one thinking about food this time of year. Between the holiday feasts and the upcoming resolutions that last about as long as an open Kit Kat bar, we love to eat. We also love to eat out. But while the casual dining sector has held up better than most economy-sensitive industries, it hasn't been a cakewalk for the cake servers.

After all, this was the year that Cheesecake Factory (Nasdaq: CAKE  ) broke its 10-year streak of positive comps. It was also when Cosi (Nasdaq: COSI  ) cratered, shedding more than two-thirds of its value since going public last November at $7 a share.

Yet the tide appears to be turning. Cheesecake Factory got right back on its caloric workhorse and started a new streak of same-store gains, while IPO watchers and a shocked Jessica Simpson saw Buffalo Wild Wings (Nasdaq: BWLD  ) soar in its market debut last month.

So let's whip out the menu and take a closer look at some restaurant chains that may inspire more than just the palate.

Smith & Wollensky (Nasdaq: SWRG  )
There are essentially two ways to make a mint in restaurant stocks. Either you find a savvy company at a reasonable price that seems to produce a steady flow of earnings in good and bad times, or you find a company that is raw on the operations side but flourishing in popularity. Smith & Wollensky falls into the latter camp.

The company has produced 16 consecutive months of comps growth. Like many high-end steakhouse chains, the operator is at the mercy of an improving economy to help drive corporate diners through its doors. But the healthy growth at the restaurant levels shows that Smith & Wollensky is thriving on that front already.

What's missing here is the profitability. While the company produced positive earnings in its March and June quarters this year, it is battling a string of annual deficits dating back to at least 1998. The upside is that the losses have been trimmed over each of the past three years, and the three analysts following the company expect Smith & Wollensky to earn between $0.10 and $0.17 a share in the coming year. With a stash of tax-loss carryforwards, the company's profitability should be magnified over the next few years.

With just 9.4 million shares outstanding, the stock is essentially trading for its book value. With two new high-traffic locations set to open next year, the potential is exponential as the company grows from its current base of only 16 steakhouses.

Cheesecake Factory
What's left to say about the popular chain of high-volume restaurants? The company produces. Period. Yet while the Stocks 2003 selection performed well this year (and may very well inspire you to check out the brand-new Stocks 2004) it is still historically undervalued. Trading at 30 times next year's earnings with enough expansion room to keep growing at a healthy clip, the stock's gains in 2004 should at least match the 25% projected earnings growth.

Lone Star Steakhouse (Nasdaq: STAR  )
There was a time in the early 1990s when Lone Star and Outback Steakhouse (NYSE: OSI  ) were Siamese twins, joined at the terminally hip. However, while Lone Star's roadhouse theme was aped often and eventually tired, Outback's reputation for quality grub moved it up like a koala on a tree.

But maybe now is the time to give Lone Star the Texas Hold'em treatment. Cash-rich and debt-free, the company is now paying a meaty dividend to lure income investors. While the stock has nearly tripled over the past three years, it is still yielding a respectable 3% payout.

The company hasn't earned its signature star yet. Earnings are down this year as stubborn beef prices and labor expenses have been running high. However, the stock is trading at 16 times next year's profit projections, which seems fair. And if you back out the company's $4 a share in cash, that multiple drops to the low teens based on Lone Star's enterprise value.

Dave & Buster's (NYSE: DAB  )
By most accounts, Dave & Buster's shouldn't even be here. The company was supposed to be taken private last year. It wasn't to be. So now the company has spent the past year paying down its debt and realigning itself toward a publicly traded future. It hasn't been easy. Comps have fallen so far this year, dragged down by the amusements side of the multifaceted eatery.

As a magnet for disposable income, Dave & Buster's may very well be the restaurant outfit with the most to gain from an improving economy. The company isn't playing games, but it's hoping that, sooner or later, patrons will.

Outback Steakhouse
Set aside the Bloomin' Onion appetizer, the sizzling steak, and the brownie-fueled goodness of Thunder Down Under for a moment. Let's talk about the company's latest concept. Paul Lee's Chinese Kitchen will aim to compete with P.F. Chang's (Nasdaq: PFCB  ) success in Asian casual dining next year. It's a segment that went mostly ignored by major operators, in part because Darden (NYSE: DRI  ) tried and failed with its China Coast.

Outback has been able to carve a respectable slice of the Italian dining segment with Carrabbas and is making seafood headway with Bonefish Grill. So if a restaurateur can make a new dining concept work, it will probably be Outback. Since P.F. Chang's is trading at roughly 50 times earnings, while Outback is fetching a more reasonable 20 times trailing profits, this may not be the pure play to cash in on the revival of Chinese casual dining -- but it's probably the smartest.

Sure, it will take years before any of Outback's concepts rival its bread-and-butter namesake chain when it comes to driving the company's financials, but that in of itself is a savory notion. Despite growing its flagship brand to nearly 800 units, it's as popular as ever.

Tasty, indeed.

Rick Aristotle Munarriz loves to eat out so much that he has written Miami area restaurant reviews for CitySearch. Eventually he'll get the hang of eating with the appropriate fork. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.


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