What a year it has been so far in the restaurant space. The "Big Five," which includes McDonald's Corp. (MCD) (down 6.5% year to date), Yum Brands Inc. (YUM) (up 9%), Darden Restaurants Inc. (DRI) (up 21%), Chipotle Mexican Grill Inc. (CMG) (up 66%) and Domino's Pizza Inc. (DPZ) (up 50%), are up an average of 28%. The biggest loser of the group, McDonald's, which is down slightly after being up 44% last year, on Thursday raised its quarterly dividend 15% to $1.16 a share, which equates to a 2.9% yield.
Chipotle was in negative return territory the last three years but quietly has staged a comeback in 2018 and currently is the fifth-best performer in the sector among companies with market caps greater than $100 million. Chipotle has been hampered over time by some very high-profile food safety issues, but investors appear to have moved on from those fears. Consider that on July 31 Chipotle shares fell 7% after the Ohio Department of Health received more than 100 calls related to food poisoning at an Ohio location. Perhaps shrugging off the incident, investors have pushed shares up 11% since then.
The comeback player of the year, however, has to be Noodles & Co. (NDLS) , which is up 138% year to date. Noodles shares were hammered in 2014 (down 27%), 2015 (down 63%) and 2016 (down 58%) before staging a minor recovery in 2017 (up 28%). Even a secondary offering in July at $10a share has not dampened the stock, which now trades at $12.50.
I must admit the Noodles & Co. story is one I can't quite figure out. At one point I believed the name might go under, lost in the sea of publicly traded restaurants. It has never turned a profit on an annual basis, although consensus estimates have the company earning three cents a share in 2018 and 12 cents a share next year. That puts the forward price earnings ratio at 100. I'm still shaking my head over this one.
Dine Brands Global Inc. (DIN) also has performed very well, up 60% year to date, and has had an interesting year. A dividend cut early in the year from 97 cents a share to 63 cents quarterly has not seemed to impact investor sentiment.
Dine Brands got a lot of mileage over the "name change" of its IHOP brand to IHOB (International House of Burgers), which turned out to be a well-played advertising stunt. In addition, I've been impressed by the Applebee's menu offerings and the consistency I've personally experienced visiting diverse locations in Montana, upstate New York and Pennsylvania so far this year. Despite the stock's run-up, Dine Brands remains one of the cheapest restaurant names, trading at 11.5x next year's consensus earnings estimate. Even the reduced dividend till equates to a solid 3.1% yield.
Elsewhere, it appears there have not been other bidders for Zoe's Kitchen Inc. (ZOES) , which last month agreed to be taken over by Cava Group for $12.75 a share. Shares ran as high as $13.70 in the weeks after the announcement due to speculation that other bidders would emerge, but they since have pulled back. The offer price is too low in my view, but it appears there may not be any other interest.
Just scratching the surface here in restaurant land, and there's more to come.
