As summer approaches, the weather is warming, tourists are traveling and romances are budding, which means it’s becoming the busiest time of the year for restaurants.
But eateries that have been benefitting from low unemployment rates, cheaper fuel and dropping commodity prices may face new challenges as minimum wage increases take effect in a number of states.
According to the latest Restaurant Performance Index, released April 29, the RPI remained “in the expansion zone” in March, at 100.7, down 1.4 percent from February. The expectations index dipped slightly as well, down 0.2 percent to 101.2 in March, but the index continues to indicate a positive outlook for business during the coming months, according to the National Restaurant Association.
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Although word-of-mouth is still considered the most important driver of restaurant business, a food establishment’s ability to promote itself through the Internet and mobile phones is becoming critical. One-third (32 percent) of patrons have used an app or coupon found online, and one in four diners have at least one restaurant-specific app on their phone, according to a recent RetailMeNot survey.
With the macro drivers of the marketplace evolving, which publicly traded restaurant brands are poised for growth in 2016?
“If you look at year-to-date performance, the stocks that have done the best have been either true growth stories, like Zoe’s Kitchen (ticker: ZOES) and Wingstop (WING), or ones with very low expectations like Arcos Dorados (ARCO) and Cracker Barrel (CBRL),” says Nick Mazing, founder of New York-based Ampera Capital, a long-short investment management firm focused on consumer equities. “The best-performing stock is actually Krispy Kreme (KKD), which is up almost 40 percent year to date, but this is because they are being acquired, so it is a one-off.”
In looking ahead and analyzing future growth potential, Mazing is considering the uphill climb U.S. restaurant stocks may face in the second half of 2016.
“While low unemployment, low gas and falling food commodity prices provided a nice tailwind into this year, restaurants will start to lap these results just as many scheduled minimum wage increases kick in. As a result, we will likely see a compression of both profitability and valuation metrics in the space,” Mazing says.
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For the second half of 2016, Mazing is looking at two companies that are not directly influenced by these factors.
“One is the McDonald’s master franchisee in Latin America, Arcos Dorados, which has done well year to date as the market is trying to price in the bottom in its largest market, Brazil, and look forward to a stabilization there,” he says. “We are also looking at Yum Brands (YUM), the parent of KFC, Taco Bell and Pizza Hut. The company has outlined a plan for a separation of its huge Chinese business and capital returns to shareholders.”
Dan Grote, certified financial planner at Latitude Financial Group in Denver, is also recommending Yum Brands because of its 11 percent gains this year. Also on his list is Bloomin’ Brands (BLMN), better known for Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, and Flemmings Prime Steakhouse and Wine Bar, which is up more than 12.5 percent so far this year, and Restaurant Brands International (QSR), known for the Burger King and Tim Hortons franchises, which has gained 7.7 percent year to date.
Grote believes the companies are doing well because of consumer strength and says cheaper fuel prices are just beginning to positively affect restaurants.
“While oil prices are rebounding, there is a lagging effect to our spending habits where the benefit of cheaper prices is empowering households to get out and spend. When we get out, we have to eat out. Restaurant stock advances are a byproduct,” he says.
Using social media as a metric to measure consumer satisfaction, the Boston-based strategy consulting firm, Stax, gives publicly traded companies a value that could also indicate future growth.
“Through our own research, we are learning that social media sentiment or engagement is not only an indicator of company success, but there is a predictive relationship between consumer ratings, positive blog sentiment and firm equity value and returns,” says Palash Misra, a director at Stax.
The firm examines the ratio of positive mentions that a brand receives online and compares it to negative mentions. A ratio greater than 1 implies there is comparatively more positive feedback or buzz surrounding a brand.
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“For Starbucks (SBUX) and Panera (PNRA), we have observed sentiment scores exceeding 2.0 times for Starbucks and 1.2 times for Panera,” Misra says. “And as customer satisfaction or customer love is a leading indicator of company success, both companies appear to be regarded favorably in the eyes of customers.”
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10 Restaurant Stocks Poised for Growth in 2016 originally appeared on usnews.com
