Casual Dining Names Getting Hit Hard

 | Sep 12, 2011 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

pfcb

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rt

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mcd

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dpz

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wen

The bloom appears to be coming off of the rose in one area of the restaurant sector, and many names are giving back some gains made in the past year. Frankly, it's not all that surprising. These cyclical names had been on an incredible run coming out of the last recession. A lot of money was made here, but the specter of a double-dip recession is weighing heavily on the sector.

Many casual dining names are being hit the hardest, which is all about the expectation that prices, once again, will be a major factor in where consumers decide to dine out. P.F. Chang's (PFCB), which operates in the more upscale end of the casual dining spectrum, has taken it on the chin as shares are down more than 30% since the beginning of the third quarter, and the stock now trades near the 52-week low. I thought this name was overpriced, but was way early on that call. In some respects, it's hard to believe that this growth story now trades at just 14x trailing earnings, 15x 2012 consensus estimates and yields 3.6% (although the dividend, which is based on a percentage of company profits, will change based on the company's performance).

Ruby Tuesday (RT), which fought its way back from nearly imploding in early 2009, is another casual dining name that is feeling the sting these days. Shares are down more than 32% so far this quarter, more than 44% year to date and are very near the 52-week low. Ruby Tuesday currently trades at 10x trailing earnings and 9x 2012 consensus estimates. Interestingly, this company holds a real estate angle; as of May 31, Ruby Tuesday owned the land and buildings for 368 of its 750 company operated locations. However, I can't get too excited about real estate at this point.

Also, I can't get too excited about single-digit, price-to-earnings ratios for restaurants in this environment. Too many uncertainties exist. Consumers are scared, and unless this economy begins to perk up, they will be less likely to dine out at places where the average checks are higher. I'm still concerned about rising food costs, as well.

In the near term, I'd expect the fast-food chains to perform better than casual dining chains. With prices likely becoming the determining factor again, any place that has a dollar menu, value menu or cheap deals for pizzas should be able to hang tough. Despite some disappointment in the McDonald's' (MCD) numbers reported last Friday -- same-store sales rose a very respectable 3.5%, but that was below the 4.9% estimate -- the company continues to thrive. Shares are up 1.5% so far this quarter.

Domino's Pizza (DPZ), up 6.5% this quarter and 68.5% year to date, continues its run up . Their pizzas are inexpensive, can be delivered and the quality has improved since the recipe change. Wendy's (WEN) should also do well in this environment, that is, if the company can finally get its act together.

Opportunities will come to snap up casual dining names on the cheap at some point. However, I believe now is not the time to do so.

 

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