So far, 2019 has seemingly been kind to the restaurant sector, with the average of all restaurant names with market caps in excess of $100 million up about 8%. While that's better than the S&P 500 (+5.5%), it slightly lags performance of smaller names, with the Russell 2000 and Russell Microcap Indexes up about 8.6% and 8.5%, respectively. Of course, the large majority of restaurant stocks are considered small or micro-caps.
The "Big Five" (a self-coined term) -- consisting of McDonald's Corp. (MCD) (up 5.5% year to date), Yum Brands (YUM) (+1%), Darden Restaurants (DRI) (+8%), Chipotle Mexican Grill (CMG) (+23%) and Domino's Pizza (DPZ) (+12%) -- are up an average of 10%, with CMG doing the heavy lifting. CMG is off to a nice start, after solid performance last year, but is trading at about 45x next year's consensus estimates.
There are a few things I'll be keeping an eye on for 2019 in this sector. The first is the possibility of continued acquisitions. Last year Zoe's Kitchen, Sonic, and Fogo de Chao were all taken private, and that came on the heels of multiple 2017 deals (including Buffalo Wild Wings, Ruby Tuesday, Bob Evans, Panera Bread and Popeye's).
In late 2017 I held out three "back of the envelope" possible acquisition candidates, Zoe's, Cracker Barrel Old Country Store (CBRL) , and Fiesta Restaurant Group (FRGI) (due to activist involvement in 2017). Zoe's was indeed acquired, but I was disappointed by the price. FRGI had a nice run-up to $30 last year, but since late October, has fallen back to the $15 range.
Meanwhile, Cracker Barrel continues to remain an interesting possibility for a couple of reasons. First, it remains real estate rich, owning 421 of its 655 locations (as of September), with substantial locations near major highways. The company also has its financial house in order, and ended its latest quarter with $102 million in cash and $400 million in debt, which is not a frightening number given the extent of company-owned real estate.
CBRL has become a cash cow of sorts, paying out significant dividends -- $8.70 per share over the past 12 months, which implies a 5.2% dividend -- that does include a $5 special dividend that you won't see reflected in most data source's dividend yield figures. However, a "special" dividend has been paid for the past four consecutive years, and at some point is no longer "special", assuming the company has the financial wherewithal to continue paying it.
A lot of pot shots have been taken at CBRL over the years (poor capital allocation, etc.), but shareholders have been well rewarded. One other interesting facet is the ownership stake by Biglari Holdings (BH) , (BH.A) (which owns 19.74%). CEO Sardar Biglari took aim at the company in 2011, ran a couple of proxy contests, and lost. While BH continues to reap the rewards (its shareholders have not) of both the run-up in CBRL shares over the past several years, as well as $40 million in annual dividend payments, at some point there may have to be an exit strategy. BH can't buy any additional shares due to a poison pill CBRL adopted to thwart its efforts to gain greater control, and its hands seem to be a bit tied at the moment (in my humble opinion) with such a huge stake in CBRL, while its own shares continue to disappoint investors. BH's stake in CBRL is worth about $800 million (without factoring in any large-stake discount), while BH's total market cap is $375 million. Tax consequences of a sale likely pale in comparison to the "discount" the market places on BH shares.
The other area in restaurant land I am looking at is where there is activist investor involvement, and I'll save that for a future column.
