Restaurant operators are not a very positive bunch right now. According to the National Restaurant Association, managers are more pessimistic about the future of the industry than they've been in 14 months. That gloomy forecast pulled down the association's performance index to below 100 for the first time in more than a year. Signs are now pointing to contraction in the industry.
We've already started to see evidence of that slowdown in earnings results. McDonald's (MCD 1.30%) just reported its first monthly drop in comparable sales since 2003. Management at the Golden Arches was downright glum while announcing Q3 results. CEO Don Thompson even cautioned investors that they could be looking at a new normal for the company.
And the grief hasn't been contained to just the established players, either. Chipotle (CMG 0.44%), which booked double-digit comparable-sales growth last year, served up Q3 figures that were also less than appetizing. The burrito king joined McDonald's in pointing to economic uncertainty and the weak U.S. economy as major headwinds.
Here's a look at how select restaurants fared over the last quarter.
|
Company |
Q3 Same-Store Sales |
|---|---|
|
McDonald's |
2% |
|
Chipotle |
5% |
|
Panera Bread (PNRA +0.00%) |
6% |
|
Yum! Brands (YUM +0.60%) |
6% |
Source: financial filings.
Winners and losers
Panera Bread, in particular, has been on a real roll. The company notched a 28% bump in earnings, making Q3 its 10th quarter out the past 11 to feature greater than 20% profit growth. The company's 6% boost in comparable sales came from a healthy 5.6% rise in average check figures and a 1% increase in the volume of transactions. Menu innovations and a successful consumer loyalty program made a positive difference in the quarter, too.
Yum! Brands also booked a less-than-depressing quarter, as it registered a 19% earnings jump in Q3. The company's strong results were powered by more growth in its China business, which logged a 22% rise in profits. And Yum! continues to bet big on China. Half of the company's new store openings in the quarter came in that country. Stateside, Yum! is having good success with its Taco Bell brand, even beating out Chipotle with a strong 7% growth in the U.S. same-store sales.
Yum! joined Panera in raising its full-year outlook after reporting those Q3 results. But shortly after issuing that report, Yum! updated its guidance again, saying the company now expects "softer sales in China," with quarterly growth in the country now expected to turn negative in Q4. Investors punished the company's shares on that news, sending them down about 10% on Friday. So the gloom in the industry has caught up with Yum! Brands, too.
Stock sales
The good news for prospective investors is that pessimism has kept prices down for many of these businesses. And so relative bargains are easier to find in the sector. Chipotle turned in the worst performance so far this year, with shares down about 25%. And Panera has done the best, returning about 18% on the year, just ahead of the market's 13% rise.
As for valuations, Chipotle and Panera appear to be the most expensive options. They're trading for around 30 times earnings, as compared with 20 for Yum! and just 17 for McDonald's. But I also like to consider a restaurant's price-to-sales ratio as another good valuation metric. By that standard, Panera looks cheap compared with other competitors:
CMG Price / Sales Ratio TTM data by YCharts.
Two tasty options
Thanks to investor pessimism about growth over the next few months, the restaurant sector offers some good options for long-term investors. McDonald's, for example, still boasts a nearly 40% profit margin and sports a dividend yield over 3.5%. Yet the business can be snapped up at a P/E ratio of less than 17, a valuation that McDonald's investors haven't seen in more than a year. That makes McDonald's a solid value in my book.
But if growth is more your taste, Panera has strong investment potential, too. For a business that's expanding profits and revenue by 28% and 17%, respectively, 30 times earnings -- or just 2 times sales -- will seem like a real bargain after the industry works through its near-term issues. These are the kinds of values that should have investors feeling optimistic, even if restaurant operators aren't.
