One of the impressive aspects of the pandemic has been the way that businesses have adapted in order to produce much needed supplies, whether they are masks, gowns, or other products needed in the fight against the virus. I'm not sure that's happened since WWII. During that era, my grandfather's GM (GM) plant in NJ switched from making car parts to full airplanes - the Grumman Avenger, which showed a great deal of effort and ingenuity in aiding the war effort.
Companies that are doing the same now, large or small, show us how that spirit is alive and well. From the large players such as Apple (AAPL) , which is producing 1 million face shields per week, to the smallest of the small that are doing what they can in the face of massive business declines, it is truly one of the positives to emerge from this otherwise frightening episode in our history.
We will be back open for business sooner or later, and I continue to peruse the wreckage for opportunities, building a list of potential candidates for purchase. I will admit though, I'm still not sure we are at "stupid cheap" levels, as there's still too much uncertainty. It's too difficult (for me anyway) to try and pick the "bottom" in this environment, but that does not mean I can't look.
When I scan the restaurant space, I remain perplexed, wondering not only when they might be able to reopen, but also how quickly consumers will come back, and to what degree? Is this the end of the industry as we know it? I'm certainly not there yet, yet remain extremely concerned.
You can slice and dice the industry any way you like. In the past I've looked at debt levels, as well as names that were not doing well before the pandemic, as those that might not make it back.
This weekend, I was looking at net profit margins (trailing 12 month), and some in the top 10 in that category might be surprising:
- McDonalds (MCD) : 28.6%
- Yum Brands (YUM) : 23.1%
- Denny's (DENN) : 21.7%
- Dunkin Brands (DNKN) : 17.7%
- Starbucks (SBUX) : 13.8%
- Nathan's Famous (NATH) : 12.3%
- Domino's Pizza (DPZ) : 11.1%
- Dine Brands Global (DIN) : 11.1%
- Wingstop (WING) : 10.3%
- Ruth's Hospitality Group (RUTH) : 9%
Perhaps most surprising is the appearance of Denny's, which has very quietly risen from the ashes over the past decade-plus. The company has transformed itself from a company-owned restaurant model to franchising, and when you do franchising right, it is typically more profitable than owning the stores. I won't bore you with forward price-earnings ratios here because they are a bit meaningless at this point. However, few might have predicted in the late 2000's that DENN would still be standing. Its shares have been creamed like a lot of others recently. The stock is down nearly 70% in the past two months, but it's back on my radar, having not it owned for years.
As always, and here's the overall disclaimer in this market environment: you've got to be careful of the "it will come back" sentiment for names you are considering, especially more distressed names with heavy debt loads. Companies can survive, even when their stocks go to zero, and shareholders can walk away with nothing.