What do Darden Restaurants (ticker: DRI), Dave & Buster’s Entertainment ( PLAY) and DineEquity ( DIN) have in common? They’re three restaurant stocks that market experts really love.
U.S. News recently screened for stocks with institutional ownership that both increased in the latest quarter and is higher than the category average. With help from TipRanks, we also screened for stocks with positive sentiment among bloggers and analysts who have solid investing track records, and applied the results on scale of zero to 100 to create a ranking of Expert Pick stocks.
[See: 7 Dividend Stocks to Buy That Pay More Each Year.]
In the June screen, only 16 stocks — in a universe of over 3,000 — managed to obtain a perfect score of 100. And three of them are restaurant stocks, an industry that’s generally struggled over the last few years. So what’s so special about DRI, PLAY and DIN?
Darden Restaurants. DRI stock gives investors exposure to an interesting portfolio of dining brands: Olive Garden and LongHorn Steakhouse are the two tentpoles, but a handful of other chains like The Capital Grille and Yard House are also under the umbrella.
Darden Restaurants isn’t what you’d traditionally consider a growth stock. But the expectations for the industry are so low, all the company has to do is grow slowly for DRI stock to rally.
For instance: When Darden reported quarterly earnings in late March, revenue grew by just 1.7 percent year-over-year, with same-store sales up 0.9 percent. DRI stock shot 9.3 percent higher that day.
But more so than the past, investors are excited about Darden’s brighter-than-expected future: in March, the company increased its guidance for same-store sales growth and earnings per share, and also announced the acquisition of Cheddar’s Scratch Kitchen, a differentiated restaurant chain with a strong brand and lots of room to grow.
Dave & Buster’s. Dave & Buster’s offers a unique experience in its restaurants, and its stock, PLAY, has offered special returns for investors as well. Shares are up 69 percent in the last year, as the part-restaurant-part-arcade chain has posted surprisingly impressive sales growth in quarter after quarter.
Considering how the growing aversion to dining out in America has hit the industry, the fact that Dave & Buster’s is expected to grow revenue by 16.6 percent this fiscal year and over 11 percent next year is quite an accomplishment.
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At its core, D&B’s is the story of a society increasingly engulfed in technology and the internet. Restaurants, with their screen-heavy atmosphere replete with high-tech arcade games everywhere, are differentiated from the competition. As brick-and-mortar retailers suffer lower foot traffic due to e-commerce, restaurants lose traffic too. To lure customers out of the house and defend against the convenience of delivery, restaurants need to offer an entirely original experience.
“Dave & Buster’s serves uniquely as an ‘adult’ arcade, a sort of Chuck E. Cheese’s for grownups,” says K C Ma, professor of finance at Stetson University. “The bulk of D&B’s profit comes from its high-margin games and amusements.”
Looking at PLAY stock’s financial statements, the company’s distinction becomes obvious. Not only did the majority — 55 percent — of revenue come from its amusement segment last year, but that segment’s margins were much higher than food and beverage segment margins. Gross margin for its amusement revenue was 88.2 percent, compared to just 74.6 percent for food and beverage.
A money-printing machine goes a long way in differentiating restaurants, and that’s translating to high growth. That competitive advantage and impressive execution is what experts seem to love about PLAY stock, and what the market seems to love about it as well.
DineEquity. Last but not least, DineEquity, which owns both Applebee’s and IHOP, also currently earns high praise from Wall Street analysts, bloggers, and institutions.
But unlike DRI and PLAY stock, DIN has been anything but popular with investors over the last year; shares are down 46 percent over that time.
The main reason why DineEquity stock has been on the decline is straightforward: since early 2015, same-restaurant sales growth at IHOP and Applebee’s have been consistently falling. In the first quarter, comps fell 1.7 percent and 7.9 percent at IHOP and Applebee’s, respectively.
So, why is this stock so popular with experts? There are a few simple reasons DIN is a popular contrarian pick: its valuation, its dividend and its profitability. Trading at less than 10 times earnings, DIN stock trades for less than half its five-year average price-to-earnings ratio of 20.3, and about 40 percent of the Standard & Poor’s 500 index multiple of 24.1.
At the same time, at 8.5 percent, its massive dividend speaks for itself. DineEquity still has the profits to finance that dividend and with EPS expected to grow by 11 percent in 2018, that will likely be the case for the foreseeable future.
[Read: Are Retail Stocks and Mall REITs a Value Play?]
While DineEquity isn’t thriving like Dave & Buster’s, analysts feel the stock is dramatically undervalued, and have a consensus price target of $62.50, implying roughly 35 percent upside.
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Why Experts Love These 3 Restaurant Stocks: DRI, PLAY, DIN originally appeared on usnews.com
