Has the American economy bottomed out? Is it time to load up on all the cyclical stocks that have been punished by the market over the past few months? I think Morton's
Pessimism is clearly priced into many restaurant stocks at present, and last week, Morton's posted numbers that on their own looked atrocious. Net income was cut in half, and same-store sales fell more than 2% on a comparable calendar basis. This still managed to beat out consensus estimates, and the numbers have given the stock a boost over the past couple of days.
Morton's results piqued my interest because a slight positive earnings surprise in a cyclical industry (a label which I certainly believe belongs on restaurants) might hint at stability in the company's core business. Beating estimates could signal a turning point or mean that the worst of the storm is over, potentially creating a nice entry point for a stock that might post substantial gains if and when the industry outlook improves. Long-term investors in restaurant stocks like Panera
However, the comments of Morton's CEO Thomas Baldwin regarding the current environment for restaurants and consumer spending quickly obliterated my current interest. I am always nervous when a CEO gives the Winston Churchill speech, in which he acknowledges the tough times of the past, notes the challenges of the present, and vows to keep a stiff upper lip against the oppressive forces that are certain to persist in the future. There is also usually a slight undertone of Grandpa Simpson. "Over the years we've encountered recessions, weak economic business cycles, wars, as well as many other business challenges." I understood the "other" to encompass floods as well as pestilences.
Mr. Baldwin certainly seems to have some gloomy imagery on his mind, and to his credit, he's not trying to sugarcoat it. What concerns me is that, from his later comments, it's clear that the company has very little control over its key near- and even medium-term profit drivers. It's hard to feel secure about an investment when you hear, "We clearly recognize that we cannot predict the future and fully understand that the external environment is well beyond Morton's control."
That's true and candid, as management commentary should be - but it's also very revealing. There's simply not much management can do in this environment, and it seems as though any significant recovery will be due to circumstances beyond the company's control.
It's hard for me to get too excited about the outlook for a stock, or an industry, when the future looks like such a crapshoot. The future for Morton's is heavily dependent on increased spending from American consumers and businesses that are facing inflationary pressures and layoffs. While long-term value investors might be tempted to nibble, they could easily see their investment turn from sirloin to hamburger in the face of such blustery headwinds.
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