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Why Many Casual Dining Stocks Crashed Hard Today

By Anders Bylund - Mar 5, 2020 at 8:21PM

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The coronavirus makes restaurant customers want to stay home and have a home-cooked meal instead.

What happened

Many casual dining chains took a pummeling on Thursday as concerns about the COVID-19 coronavirus continued to grow. On a day when the S&P 500 closed 3.3% lower and fast-food giants Wendy's (WEN -0.52%) and McDonald's (MCD -0.35%) fell by roughly 4% each, sit-down dining chains dipped much lower. Olive Garden parent Darden Restaurants (DRI 1.77%) fell 7.5%, Western-themed steakhouse operator Texas Roadhouse (TXRH 0.09%) dropped 10.3%, and Chili's owner Brinker International (EAT -2.42%) took a 10.6% haircut.

So what

The coronavirus continues to spread across the country, as 221 U.S. cases have been confirmed so far, including 12 deaths. California declared a state of emergency on Thursday as the disease led to its first death there. Emergency management teams, school districts, and other official bodies from coast to coast are urging Americans to wash their hands more often, avoid touching their faces -- and limit exposure to large crowds.

That last one is bad news for an industry that depends on consumers getting out of the house to have a casual meal in a sit-down restaurant. Fast-food vendors are seen as less intimidating since you can just swing by their drive-through windows with minimal human contact.

The interior of a bistro-style restaurant with zero customers and no visible staff.

Investors are envisioning scores of empty restaurants while the virus scare lasts. Image source: Getty Images.

Now what

This isn't the Black Death or the second coming of smallpox and polio, though some headlines make it sound that way. Consumers may be overreacting to the COVID-19 threat, and investors are taking the consumer reaction to heart much too quickly. Recent infectious disease scares like SARS and the bird flu failed to stop the world as we know it, and the COVID-19 coronavirus will eventually pass as well. 

But for the casual dining restaurants whose shares plunged today, perception really is the reality. If people are staying home in a coronavirus-triggered panic, or simply going out a bit less just to be on the safe side, that's enough to drive foot traffic lower to a measurable degree. A short-term drought can drive poorly run or excessively debt-laden companies into the ground very quickly. On the other hand, high-quality operations with strong balance sheets will come out swinging on the other side, ready to launch a swift comeback.

Texas Roadhouse, Darden, and Brinker all fall into the high-quality category. All of them sport manageable debt balances and strong returns on invested capital, and the biggest knock against Darden and Texas Roadhouse lately has been their inflated valuations.

Well, the virus scare is taking care of that issue in a hurry. Opportunistic investors might want to take a closer look at these down-but-not-out restaurant chains while the coronavirus-based discounts are in effect.

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Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$121.93 (1.77%) $2.12
Brinker International, Inc. Stock Quote
Brinker International, Inc.
EAT
$23.39 (-2.42%) $0.58
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
TXRH
$77.02 (0.09%) $0.07
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$247.03 (-0.35%) $0.87
The Wendy's Company Stock Quote
The Wendy's Company
WEN
$19.03 (-0.52%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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