Yesterday, I tried my hand at cooking chicken marsala, a favorite I often order at local restaurants. However, when it came to the part of the recipe that called for marsala wine, I called an audible, bold or stupid as it was, and instead substituted Fireball whiskey. My better half questioned the move (and declined to taste my new concoction), but that's how great recipes get their start. The result was interesting; a combination of sweet and salty, akin to eating kettle popcorn. The jury is still out though, and I will give the recipe a second try today with the leftovers.
Talk about the jury being out, following a subpar year in 2019, restaurant stocks are off to a decent year early in 2020. A basket of 40 restaurant names I track (minimum market cap $100 million) are up about 4.7% on average, better than the S&P 500 (+2.1%), Russell 2000 (-.33%) and Russell Microcap (-1.01%).
The "Big Five" (a self-coined term) -- consisting of McDonald's Corp. (MCD) (+6.9%), Yum Brands (YUM) (+4.2%), Darden Restaurants (DRI) (+8.2%), Chipotle Mexican Grill (CMG) (+3.9%) and Domino's Pizza (DPZ) (-3%) - are doing just fine at this point, up an average of about 4%.
CMG is continuing to head higher following a blistering 2019 which saw shares rise 94%. While that followed a great 2018 (+49%), the prior three years of 2017 (-23.4%), 2016 (-21.4%) and 2015 (-29.9%) were not kind. In fact during the five year run from the beginning of 2014, CMG shares returned, putting the return from the beginning of 2015 through Friday, at just 27% (not annualized). CMG currently trades at about 48x next year's consensus estimates. Certainly not cheap for restaurants in general, but CMG has traded for much higher multiples. Certainly does not have the look of a buy and hold candidate, and is one to trade if you are so inclined (I'm not).
The best performer year-to-date is small name The Habit Restaurants (HABT) (+34%), courtesy of YUM's January 6th $14 per share offer. It proves that M&A is alive and well in the restaurant sector, but is a somewhat bitter ending for the name which went public in 2014 at $10, and once traded above $40/share.(I suspect we may see more restaurant deals this year, and will cover in an upcoming column).
The worst performer so far in 2020 is Carrols Restaurant Group (TAST) (-32%). TAST has been unprofitable for the past three quarters, and is expected to lose eight cents per share in 2020, an improvement over what is expected for full year 2019 (-29 cents). TAST, which franchises 1030 Burger King's and 60 Popeye's restaurants in the U.S., has fallen nearly 30% since it issued preliminary fourth quarter sales results on January 13 which showed decelerating sales in November and December. The following day, the company presented at the annual ACR Conference. It is not a name that I am all that familiar with, but perhaps it is time for a deeper dive.
The "cheapest" names in terms of forward price earnings ratios include Brinker (EAT) (10), Dine Brands Global (DIN) (11.4) and Bloomin' Brands (BLMN) (12.5). I'll be devoting more upcoming columns to the sector as there is a lot to cover.