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.
