Restaurant stocks were hot earlier this year; now they're not. Fast-food restaurant stocks, in particular, have been taking it on the chin recently as rivals duke it out with new lower-price menus. The resulting price war has already caused casualties to several of these players' earnings estimates. Nevertheless, a contrarian investment stance may be in order, given the bargain valuations now being assigned to this group.
Here's a rapid-fire summary of what's caused the carnage in this group recently. Two weeks ago today, Wendy's
The result has been stock market carnage for these stocks. Compared to its 52-week high, McDonald's has fallen 49%; Wendy's, 35%, Jack in the Box, 51%; and Yum! Brands, 28%. The upshot, however, is that the current bad news has largely already been discounted into these companies' stock prices. Check out where P/Es for this group stand based on current earnings estimates for 2003:
Recent 2003 EPS Forward Price Estimate P/E McDonald's $15.57 ~$1.40 11.1 Wendy's $27.04 ~$2.11 12.8 Yum! Brands $23.84 ~$2.06 11.6 Jack in the Box $16.61 ~$2.03 8.2
For a group that over the past seven years has an average P/E of around 20, the current prices look awfully cheap. Wendy's, in particular, seems to represent a company that's not in the throes of reorganization, but is merely suffering in sympathy with its peers. Also, consider that Wendy's is owner of fast-growing subsidiary Baja Fresh, a tex-mex grill which, if you haven't tried it, is fantastic.