Analysts Dig Into Restaurant Downgrades

 | Jul 27, 2016 | 12:00 PM EDT
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Yesterday was not a good day in restaurant land; in fact, it was quite a rough ride for several names, and the sector as a whole. While I am still a fan of a few select names, primarily special situations, I've made no secret of my belief that overall valuations for the sector have been overheated for quite some time. However, that situation has lingered far longer than I thought it would, so I am no hero for making that call. It's just that valuations have gotten out of whack after a multiyear bull run. Analysts' downgrades came in droves yesterday as there's a growing consensus the industry has topped out, and Stifel Nicolaus, which believes a recession is on the way, cast a big shadow.

Noodles & Co. (NDLS) suffered the greatest damage, falling 23% following the late Monday announcement that CEO Kevin Reddy had stepped down. The company also lowered revenue guidance below consensus estimates for the second quarter, and forecast negative same-store sales for the same period. The stock was also the victim of multiple analyst downgrades, by BMO Capital Markets, Zacks and Jeffries. Noodles shares are down 47% over the past year and trading at an all-time low.

I'd heard great things about NDLS, and several months back tried it out for myself while picking up one of our children from college. Definitely a different concept with a focus on noodles and pasta; but I was not all that impressed. While the dish I had was tasty, there was almost too much flavor for my liking. I do need to give it another shot, though. This nearly 500-store chain (422 company-owned stores, 70 franchised) now trades at an enterprise value of less than $300 million, but obviously has some work to do.

Other restaurant movers yesterday:

  • Red Robin (RRGB) , down 5%: Burger chain that is perhaps best known for its "endless fries" was downgraded by Jeffries. Shares are down 48% over the past year.
  • Texas Roadhouse (TXRH) , down 6%: One of several restaurant stocks downgraded by Stifel Nicolaus. Stock is up 18% over the past year.

Other Stifel restaurant downgrades included Panera Bread (PNRA) , down 4%; Darden (DRI) , down 4%; Cheesecake Factory (CAKE) , down 5%; Chipotle (CMG) , down 2.5%; and BJ's (BJRI) , down 5%, all of which were lowered to Sell. (Panera Bread is part of TheStreet's Action Alerts PLUS portfolio.)

Meanwhile, the firm also lowered Zoe's (ZOES) , down 5%; Dave & Buster's (PLAY) , down 3%; Chuy's (CHUY) , down 10%; Del Frisco's (DFRG) , down 3%; and El Pollo Loco (LOCO) , down 7%, to Hold.

I can't remember the last time I saw so many downgrades in the sector in one day, if ever, but it appears the bloom has officially come off the restaurant rose.

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