Tough times for consumers have made investments in the restaurant sector riskier than usual. However, McDonald's (NYSE: MCD) and Chipotle (NYSE: CMG), which both recently reported quarterly results, may be appetizing stocks for investors hungry for long-term gains.
A tale of two restaurants' quarterly results
|
Company |
Earnings Growth |
Revenue increase/decrease |
Same-store sales Gain |
|---|---|---|---|
|
McDonald's |
12.1% |
5.3% |
4.8% |
|
Chipotle |
31.3% |
20.1% |
8.7% |
All data from company press releases for the most recent quarter.
McDonald's improved its second-quarter earnings by 12%, or $1.23 billion, with help from high-margin drink sales and the unsurprising popularity of its dollar menu. Although the Golden Arches beat analysts' profit expectations, investors still balked last week, sending the shares lower on the news. Analysts had expected a 5% increase in same-store sales, and Mickey D's just barely missed.
On the other hand, Chipotle served up a spicy good time for investors. Net income increased 31.3%, to $46.5 million, or $1.46 per share. As you can see in the table, revenue and comps both surged. Even better, Chipotle said higher customer traffic drove most of the comps growth. That's what investors want to see in a restaurant stock these days.
Not all restaurant stocks are tasty
High unemployment and other economic troubles are influencing folks' discretionary spending, leaving some restaurant stocks seriously unappetizing right now. Middle-of-the-road restaurant stocks such as Ruby Tuesday (NYSE: RT), and higher-end restaurants like Ruth's Hospitality (NYSE: RUTH) and McCormick & Schmick's (Nasdaq: MSSR), might not be high on cash-strapped consumers' lists of go-to restaurants at the moment.
Investors should also think twice about recent IPO high flyer OpenTable (Nasdaq: OPEN), which specializes in electronic restaurant reservation products. Eating out is one of the first and easiest things to knock out of a constrained budget. Investors should be leery of paying 60 times 2011's earnings for shares in a company expected to grow profit by 50% that year, especially given the possibility that analysts are overly enthusiastic about its growth prospects. OpenTable's exposure to a moribund restaurant industry seems less than appealing now.
Speaking of the ugly environment, NPD Group recently released data showing that consumers' pain has hurt the restaurant business, which slipped 1% overall in spring. NPD said that Americans visited restaurants 3% less often and shelled out less money when they did dine out.
This decline has primarily hurt independently owned businesses, which represent 54% of U.S. eateries; there are 2% fewer mom-and-pop restaurants now than there were last year. As sad as this is for small businesses, it could help some chains, which are weathering the storm more successfully. Companies with cheaper menu options, like McDonald's and Chipotle, seem like good bets to benefit hugely from thinning competition and consumers' newly penny-pinching ways.
Maybe a little of both?
McDonald's quarter simply wasn't bad, while Chipotle's was muy sabroso. McDonald's does look a heck of a lot cheaper than Chipotle, trading at 16 times earnings versus Chipotle's nosebleed 31 times. But since Chipotle exhibits extremely impressive high growth, and is a less mature restaurant concept overall, investors may want to accept the risk of its high valuation, given the possibilities for continued flaming-hot growth.
Defensive investors would do well to leave many restaurant stocks alone, but McDonald's and Chipotle both seem like good, solid stock ideas. What do you think? Take our poll, and then let us know which restaurant stocks you think are most appetizing in the comment box below.
