How Are Restaurants Faring?

 | Jul 29, 2016 | 12:00 PM EDT
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Stock quotes in this article:

rt

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ndls

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bjri

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dfrg

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play

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pnra

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cmg

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din

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bobe

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mcd

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eat

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dnkn

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dri

Many are calling for the end of the U.S. restaurant sector's bull market, and I personally believe that a revaluation is underway in the sector. But while I've seen bear markets where you can pick up quality restaurant names at single-digit price-to-earnings ratios, I'm not sure that we'll see that scenario anytime soon.

Now, it wasn't my plan to write about nothing by restaurant stocks this week, but market circumstances have dictated that I do so -- especially given the recent flood of downgrades to the sector. (I also wrote about Ruby Tuesday (RT) earlier this week.)

The trading action since the segment's big losses earlier this week has been mixed. Let's check in on a few key restaurant names:

Noodles & Co. (NDLS)
This stock, has lost some 8% over past two trading days, bringing its total red ink for the week to about 25%.

Noodles certainly picked the wrong week to become engulfed in turmoil. The chain lowered its guidance and announced CEO Kevin Reddy's departure at the same time that concerns arose for the industry as a whole.

Mixing industry risk with company-specific risk can be a veritable "double whammy" for a stock. It's one thing to be a great company in an industry with some cracks, but quite another to be a struggling firm in an industry that's under scrutiny.

The Sector's Other Key Losers
A few other restaurant names have suffered further damage since Tuesday. For example, BJ's Restaurants (BJRI) gave back another 8% or so.

Meanwhile,  Del Frisco's (DFRG) was rebounding at last check today, but was still down some 2% from Tuesday's close and around 6.5% for the week. Dave & Buster's (PLAY) has likewise lost another 3%.

Stocks That Are Stabilizing
Some restaurant names have either recovered or are at least flat. For example, Panera (PNRA) is up some 6.3% since Tuesday's close and is now in positive territory for the week. Similarly, Chipotle Mexican Grille (CMG) -- the granddaddy of 'em all -- has been essentially flat since Wednesday.

The Bottom Line
So far, it appears that investors aren't buying into the notion that restaurants' multiyear run is coming undone.

But it'll be interesting to see how the higher-yielding restaurants fare in this environment, and whether dividends payouts will cushion any potential stock-price blows. As I write this, seven restaurant stocks combine $500 million+ market caps with dividend yields at least 1% higher than the 10-year U.S. Treasury yield:

  • DineEquity (DIN) , 4.59% dividend yield.
  • Darden (DRI) , 3.75% payout.
  • Bob Evans (BOBE) , 3.71% yield.
  • McDonald's (MCD) , 2.98% payout.
  • Cracker Barrel (CBRL) , 2.95% yield.
  • Brinker (EAT) , 2.74% dividend payout.
  • Dunkin Brands (DNKN) , 2.59% yield.

Interestingly, several of the above names own a substantial amount of their restaurant locations, with Cracker Barrel, Bob Evans, and McDonald's leading the pack.

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