Last week's 24-hour live chat with The Fool proved to be a great benefit to charity and helped increase my awareness of what interests The Motley Fool community. A frequent sector that came up was restaurants.
Restaurants tend to be a slower-growth sector that is heavily tied to overall economic activity and consumer spending, but the upside is that the stocks rarely experience wild fluctuations in price. I'm not overly optimistic about consumer spending as long as unemployment figures remain high, so I propose we look at two dining stocks that could be worth selling in 2011.
Rooty tooty sell
DineEquity (NYSE: DIN) somehow always finds its way onto the short list -- no pun intended. DineEquity, the owner of Applebee's and IHOP, has been moving in the right direction recently, returning to profitability, so why would I be a seller? Largely because of its high debt and inconsistent track record on margins.
DineEquity did refinance $1.8 billion in debt to a lower interest rate, but it will need to focus a lot of its cash flow on continuing to pay down this debt regardless of the lower rate. This diverted cash flow takes away from any hopes of expanding its business.
DineEquity has also brought wild margin swings, from minus 4% to 22% over the past five years. It has done an OK job of reining in expenses, but should food costs rise in 2011, margins could be crippled and weigh heavily on same-store-sales comparisons.
What could you replace it with?
Why not Buffalo Wild Wings (Nasdaq: BWLD)? It's a dine-in restaurant that maintains a balance sheet with $71 million in cash and is free of debt. Buffalo Wild Wings has a considerably better long-term growth rate and has maintained considerably tighter margins over the past few years.
Keep driving
Sonic (Nasdaq: SONC), despite being a relatively inexpensive drive-in, has been obliterating investors' hard-earned money over the past three years. Revenue has fallen for two straight years and is poised to fall again in 2011.
A 6.4% drop in same-store sales, a weak consumer, falling property prices, and hefty long-term debt levels are at the heart of Sonic's woes. Sonic has had one struggle after another trying to get consumers back, but has opted to shed underperforming properties to reduce expenses. This rarely proves to be a successful long-term approach, and at nearly 29 times book value, it might be best to leave Sonic alone.
What could you replace it with?
How about McDonald's (NYSE: MCD)? The Golden Arches sports a healthy profit margin of 21% over the past 12 months and maintains a strong enough cash flow to support its expansion. McDonalds has a 3.2% dividend yield, and unlike Sonic, maintains a strong track record of growing shareholder equity.
Have an opinion on the dining sector? Let's hear about it in the comments section below.
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