It has been another good year for restaurant stocks, with the "Big Five" -- consisting of McDonald's Corp. (MCD) (up 9% year to date), Yum Brands Inc. (YUM) (up 10%), Darden Restaurants Inc. (DRI) (up 20%), Chipotle Mexican Grill Inc. (CMG) (up 68%) and Domino's Pizza Inc. (DPZ) (up 41%) -- up an average of 30% year to date, handily trouncing the S&P 500 (up 4%). A strong economy has been a friend to the space as consumers are not shy these days about eating outside the home.
The best performer is a bit of a surprise. This time last year, Dine Brands Global Inc. (DIN) , the parent of IHOP and Applebee's, was languishing in the low $40s and was down 40% year to date. Indeed, it was the only restaurant name that qualified for my 2017 tax-loss selling list, the aim of which was to identify stocks already under pressure that investors might dump prior to year-end in order to offset gains. The theory is that once the New Year started, investors potentially would pile into these names.
Dine Brands has worked well to that end and is up 84% year to date. Despite the rise, it still trades at about 13x next year's consensus earnings estimates. DIN has a streak of four consecutive positive earnings surprises, yet it is a bit surprising that just four analysts currently cover the name. One other surprise is that the stock's success comes on the heels of a 35% dividend early this year.
One of the worst performers and biggest disappointments has been Biglari Holdings Inc. (BH) , parent of Steak n Shake and also a huge stakeholder in Cracker Barrel Old Country Store Inc. (CBRL) , owning nearly 20% of the company. Biglari adopted a dual class share structure back in May; its A shares (BH.A) have the voting rights and trade for about five times the B shares, which don't have voting rights; it has been downhill ever since that move. The A shares are down about 29% since the conversion, while B shares have fallen about 40%.
Biglari remains an enigma; its unapologetic management shuns the financial press and it operates in a structure that investors find confusing. Oriented for the long haul and seeking to build a "museum" of businesses, CEO Sardar Biglari is never shy about telling investors that if they are focused on the short term and don't buy into his philosophy they should leave. Of course, all the mystery and apprehension about the way the business is run, and how the CEO is compensated, contribute heavily to the shares' massive discount, which I term the "Biglari discount."
BH's ownership stake in Cracker Barrel, valued at about $800 million alone, greatly eclipses its own market cap of $464 million, and that's without considering the value of Steak n Shake, the small Western Sizzlin' restaurant chain, First Guard Insurance and other assets. In addition, the Cracker Barrel stake has generated an estimated $41 million in dividends to BH in 2018.
Something is desperately wrong with this picture; the discount has grown far too wide, and I remain a long-term embittered shareholder, the ranks of which are likely growing by the day.
