Restaurant Stock Crawl: Chipotle, McDonald's, BWLD and 4 Off the Beaten Path

 | Oct 26, 2017 | 12:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:














As markets are driven higher by generally favorable third-quarter earnings results, a restaurant sector that remains overpriced has not been doing its part.

Tuesday's results after the market's close from Chipotle Mexican Grill Inc. (CMG) , one of the "Big Five," were below expectations; the company missed the consensus earnings estimate of $1.63 a share by 17 cents, while revenue of $1.13 billion missed by $10 million. Same-store sales were up just 1% for the quarter, though this is one time when you partly can buy the excuse retailers often use for a subpar quarter -- "it was the weather" -- given the recent hurricanes. But even absent the effect of the hurricanes, which the company says cost it 0.5% in same-store sales, the bloom continues to come off the Chipotle rose.

Lest you think I am a Chipotle basher, let me unequivocally state that it is one of my favorite places to grab lunch; I've never had a bad meal there (and yes, I do remember all of the E. coli incidents). The simplicity of the menu should be a model for others; if you serve good food, you don't need 200 different menu items.

However, investor expectations have been way too high for Chipotle and 1% comps don't cut it when you are used to double digits; also, the company's queso launch went over like a lead balloon. With yesterday's trading pushing the shares down nearly 15% to $277, a six-year low, growth investors have been rethinking this one, which unbelievably topped out in the $750 range in July 2015. Shares are still expensive, trading at 29 times 2018 consensus estimates. Guidance for the fourth quarter implies negative same-store sales. This is a classic case of "good food, bad stock," and the $100 million stock buyback announced by the company is a drop in the bucket.

McDonald's Corp.'s (MCD) results were OK, as the Golden Arches narrowly missed on earnings per share (one cent) and narrowly beat on revenue ($10 million). However, the name remains the gold standard in restaurant stocks with its near-20% net profit margins. The rapid growth days are well behind; while the "global delivery" initiative sounds interesting, I can't justify paying 23 times forward earnings for the most-followed name in the industry, which is up 50% over the past year. That's not necessarily expensive for a name with such solid margins, but I just don't see any excitement there, or room in the price.

After the market closed yesterday, Buffalo Wild Wings BWLD, which has had some shaky quarters recently with below-consensus earnings the past three, delivered some surprising results. The company reported "adjusted" earnings per share of $1.36, well ahead of the $0.79 consensus, while revenue of $496.7 million missed by $4.92 million.

BWLD delivered those results with a 2.3% decrease at company-owned stores, and 3.2% decrease at franchised stores. Cost of sales rose 190 basis points as chicken wing prices increased 25.6% versus the same period last year, while operating and labor costs fell 40 and 60 bps, respectively.

This is all a bit perplexing; BWLD shares are up about 18% Thursday morning primarily because the company lifted full-year guidance to $4.85 to $5.15 per share, from $4.50 to $5.00. I am really curious to see how the markets digest this quarter in today's trading. I remain unimpressed by this company.

Those names in the sector that I actually like or own are few and far between, and some are off the beaten path, but that's not unexpected. Cracker Barrel Old Country Store Inc. (CBRL) remains a favorite, trading at about 17 times forward earnings -- not cheap, but cheaper than most -- and with improving net margins over the years as it returns cash to shareholders via dividends and sports a very decent balance sheet. My current position is an indirect one, via Biglari Holdings Inc. (BH) , which owns about 20% of Cracker Barrel.

I also hold Zoe's Kitchen Inc. (ZOES) , and up-and-comer that has fallen back to earth; this is a more speculative play on a newer concept (fresh casual Mediterranean food), and the company has much to prove, with its shares down nearly 50% year to date.

The more upscale Fogo de Chao Inc. (FOGO) , which has taken its lumps recently after reducing guidance, remains intriguing, although I've yet to take a position. At about 12 times next year's consensus estimates, it's one of the cheaper names out there.

Finally, DineEquity Inc. (DIN) , of Applebee's and IHOP fame, also looks intriguing. While it is a bit more leveraged than I'd prefer with $1.4 billion in debt (primarily long term), it trades at just 10 times next year's consensus estimates and yields nearly 8.5%. Interestingly, just five analysts follow the name versus 25 for Buffalo Wild Wings, 30 for McDonald's and 33 for Chipotle. I rather like names that are under-followed.

-- This article, first published on Oct. 25, has been updated for Buffalo Wild Wings earnings, reported after the market close Oct. 25.

Columnist Conversations

$3.2 billion is a pretty penny for PepsiCo (PEP) to pay for SodaStream (SODA) . The company better hope peop...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.