4 Hungry Stocks on the Move

It's been a busy week for restaurant stocks, and I'm not even talking about the brow-raising liquidation of the parent company behind the Bennigan's and Steak and Ale chains. Plenty of publicly traded chains that you -- and your gut -- may know all too well reported earnings this week. It's time to get those taste buds going, investors.

I realize that this may seem like the worst possible time to dive into this sector. Food costs are rising, squeezing margins even as penny-pinching patrons demand menu specials. Higher fuel prices are a double whammy, sucking out discretionary income while giving drivers one more reason to stay home for dinner.

Great! Perfect, really. This kind of climate will shake out the weaker players. I'm going to miss you, Bennigan's, but your exit will make it that much easier for the survivors to thrive when the economic lull passes. When even Starbucks (Nasdaq: SBUX  ) is planning to close more domestic stores than it opens in the year ahead, there are opportunities for companies still moving forward.

I don't care if I'm one of the few still following restaurant stocks. My relative solitude will make it that much easier to get in early on the chains that will lead the way -- make that feed the way -- in the future.

Let's go over some of this week's reports:

Denny's (Nasdaq: DENN  )
The value-priced diner has been serving up grub at great prices for ages, so it's already giving the market what it wants. Comps don't necessarily bear that out in the latest quarter -- falling by 0.7% at company-owned units, with a steeper 3.7% plunge at franchised locations -- but Denny's is built to last.

Revenue fell by a sharp 21% during the quarter, to $190.3 million, but that is the result of the company's plan to sell more of its company-owned stores to franchisees. The initiative will eat away at the top line, of course, but it should result in higher-margin franchisee royalties. Since all of the asset sales blur the path to the bottom line, it's best to judge Denny's by its pre-tax adjusted income figure (which backs out several one-time charges). The diner's performance nearly quadrupled there, to $5.7 million. That's still a small absolute sum, but at least it's a profit in these challenging times.

Morton's (NYSE: MRT  )
On the other end of the pricing spectrum, Morton's of Chicago is also scoring with carnivores. The chophouse chain's stock opened 7% higher this morning after the company posted a solid report. No surprise, given its niche of feeding premium steaks to the corporate dining crowd.

Comps fell by 1.9% during the quarter, but Morton's still expects to post positive comps for all of 2008. Revenue inched 4% higher to $88.7 million. Earnings dipped to $0.11 a share, but Morton's is looking to earn $0.57 a share to $0.62 a share this year. Opening new steakhouses and updating its stuffy bars with the more accessible Bar 12-21 concept is the right approach. We'll get a better snapshot of the chophouse segment when Ruth's Chris (Nasdaq: RUTH  ) reports next week, but it certainly seems that the upscale chains are exceeding Mr. Market's expectations.

Kona Grill (Nasdaq: KONA  )
Things are going a little rougher for Kona Grill. The classy, Polynesian-flavored casual-dining chain, with its signature Macademia-encrusted chicken, saw its stock hit new lows this week after a dreadful report.

Comps fell by 5.6%. Last year's second-quarter profit turned into a loss this time around. The company is also talking down its guidance. Kona Grill is still early in its growth cycle, with less than two dozen locations. If it can turn its unit sales around -- proving to investors that the blip is temporary, not indicative of waning popularity -- the inventive concept could be one to watch as it wades into the single digits.

Texas Roadhouse (Nasdaq: TXRH  )
Casual steakhouse concepts are hard to find on the stock listings page. Outback, Lone Star, and Logan's Roadhouse have been taken private, while Darden (NYSE: DRI  ) snapped up LongHorn Steaks. That apparently spells opportunity for Texas Roadhouse, which aims to open 30 new steakhouses this year.

Expansion is helping offset a slight dip in comps. Quarterly revenue grew by 20% to $217.3 million, and earnings rose 13% to $0.14 a share. The company expects fully diluted earnings per share to climb 5% to 15% higher this year. That's not exactly peanuts -- or even a floor full of peanut shells -- in this dicey environment.

Am I really the only one watching these stocks? Is this really a table for one? Prove to me that I'm not lonely. In 100 words or less, hit the comment box at the bottom of this page and let me know about your favorite restaurant stock.

Related Foolishness:

Starbucks is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz is the rare foodie who embraces restaurant chains. He's also glad that Morton's finally opened near his home last month. He does not own shares in any of the companies in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 31, 2008, at 2:55 PM, hoosiermoney wrote:

    Texas Roadhouse seems to be doing quite well in the current environment. I have been going to their restaurants for about 8 years now and no matter which city I am in that has a TR, they seem to be busy. Their food and service is excellent and the pricing is reasonable. They are very customer oriented and this leads to a loyal following. I think they will experience increased growth as the economy picks up. The current stock price of nine dollars plus should be a wise investment longer term.

  • Report this Comment On July 31, 2008, at 4:18 PM, AaronRogers wrote:

    Ruth's is the public company that will emerge the best out of this trough. The ability to franchise internationally and domestically allows for better margins as well as a diversified clientelle base. They are streamlining operations making them more efficient. The more foreclosures the better. Those who cannot afford nice things will find their number 1 debt burden alleviated. Rents are dramatically less thus, people will dine out. Remember restaurants are the first to enter a recession but they are the first ones to come out of one. When times change people don't rush into cars or houses they go out to celebrate and drink.

  • Report this Comment On August 02, 2008, at 7:53 PM, garyedd wrote:

    TXRH may have just the right formula to thrive while the carnage in the restaurant business gors on. The family meal ticket is reasonable, and compared to other higher priced options or actually cooking (?!) Texas Roadhouse seems to be a choice that still has a long wait at the door. They train employees well, feed customers well, and have a consistent look and menu. And, its still steak. The stock has been beaten down by all the reasons restaurants suffer. To pick a success stock at a bottom in this industry, finding a healthy growing company without much debt is a decent optoin.

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10/27/2016 4:00 PM
DENN $10.18 Up +0.07 +0.69%
Denny's CAPS Rating: ***
KONA $10.60 Down -0.15 -1.40%
Kona Grill CAPS Rating: **
MRT.DL $0.00 Down +0.00 +0.00%
Morton's Restauran… CAPS Rating: *
TXRH $39.25 Up +0.39 +1.00%
Texas Roadhouse CAPS Rating: *****
DRI $61.52 Up +0.36 +0.59%
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RUTH $14.45 Up +0.20 +1.40%
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