It's safe to start going out to eat again.
The economy appears to have bottomed out, and it's just a matter of time before casual dining begins to win back hungry patrons. Yet whether we're talking about shell-shocked consumers who have shied away from eating out, or just about folks making a logical upgrade from "dollar menu" fare, investors shouldn't just settle for the ubiquitous chains that already inhabit every city street corner. You can leverage the likely rebound by looking for smaller companies with more room to grow.
Sure, there are plenty of established eateries worthy of your investing dollars:
- McDonald's (NYSE:MCD) has thrived during the recession, yet its barbell pricing approach finds it tacking on premium salads, sandwiches, and iced coffees to retain customers once people move on from their "dollar menu" appetites.
- Cheesecake Factory (NASDAQ:CAKE) is one that I own. It's the class of casual dining, and it has the high-volume restaurants to show for it. However, the haven of heaping portions and Tolstoy-esque menus now commands a market cap of greater than $1 billion. It's not exactly under the radar anymore.
Instead, let's dig deeper. I looked at four obscure Internet stocks two weeks ago, and I turned my attention to Chinese equities last week. This time, I'm going to delve into a few restaurant stocks that the market appears to be ignoring. You won't find any billion-dollar babies here, but I will stick with companies that sport a market cap of at least $100 million, because we also don't want to paddle too far into uncharted waters.
Ready? Let's go.
BJ's Restaurant Group (NASDAQ:BJRI)
Not every table-service concept has been shrinking during the market downturn. In its latest quarter, BJ's posted a 17% spike in revenue, to $107.7 million. Earnings grew even faster, up 52%. Expansion is the key, as comps fell during the period, but it's hard to scoff at a mere 1.3% decline in comps when many of its larger peers are getting pummeled.
There are just 85 BJ's Restaurant & Brewhouses out there, with a little more than half of them in California. I've hit up the one in Orlando, Fla., a few times, and I'm a big fan of the eclectic brews and wild deep-dish pizzas.
BJ's isn't exactly cheap -- it's fetching 31 times this year's earnings and 26 times next year's projected profitability -- but the growth is real, and the upside is there. BJ's has also blown past Wall Street expectations in each of the past three quarters, so even current targets may be conservative.
Buffalo Wild Wings (NASDAQ:BWLD)
This chicken-wings specialist isn't an obscure name around Fooldom. It's been a popular Motley Fool Hidden Gems recommendation for five years.
It hasn't been a disappointment, either. The family-friendly sports bar has been an all-weather winner. Comps are positive even in the recession, as patrons are drawn to the ample selection of brews and sauce-dunked poultry at reasonable prices.
B-Dubs' financials are rocking. Revenue and earnings grew by 32% and 24%, respectively, in its latest quarter. Those are some heady growth rates, and even better, the stock is trading at a reasonable valuation: 23 times this year's bottom-line showing and 19 times next year's target.
OpenTable (NASDAQ:OPEN)
As a member of the Motley Fool Rule Breakers analyst team, I would be remiss if I didn't include at least one active recommendation in the list. OpenTable is it.
You don't have to limit your search to actual eateries if you want to cash in on the industry's rebound. OpenTable is the undisputed champ of online dining reservations. More than 11,000 establishments now use OpenTable's electronic reservations.
Loyalty programs such as Rewards Network (NASDAQ:DINE) are compelling outlets to smoke out leads, but OpenTable provides an entire ecosystem. Restaurants pay a subscription fee to use the company's proprietary touchscreen terminals, which combine call-in reservations with instantly confirmed requests through OpenTable.com. Eateries also pay OpenTable for any online reservations that are successfully seated.
This may seem like a lousy time to cater to the higher-end spectrum of the dining scene, but lead-hungry chophouses and bistros are flocking to OpenTable. There are 22% more restaurants on the OpenTable system now than there were a year ago.
With revenue climbing 18% in its first quarter as a public company and earnings more than tripling, OpenTable will really start cooking once folks rediscover the joys of eating out. Insider selling through a recently announced secondary offering is problematic, but the business model is clearly working.
CEC Entertainment (NYSE:CEC)
Few parents know that Chuck E. Cheese -- the hectic hub of arcade games, ball pits, and cheese pizzas -- is part of a public company.
If you found that your kids had a little more elbow room the last time you treated them to Chuck E. Cheese, you're right. Revenue, comps, and earnings all inched lower during CEC's latest quarter. The upside is that CEC stock is as cheap as those single-token arcade games. Investors can buy into the company for around 10 times this year's profit guesstimates. The kid magnet has also been buying back stock, because it, too, knows a bargain when it sees one.
I'll be back next week with four "under the radar" stocks in a different industry. Which industry should I cover next? Let me know in the comment box below.
