What are we looking for?
Well-valued U.S. restaurant chains after the recent sell-off.
In 2016, U.S. consumers for the first time spent more in restaurants than in grocery stores. This is the result of a long-term trend in which the number of restaurants and bars in the United States has increased by 30 per cent in the past 15 years. In the past year, the Dow Jones U.S. restaurant and bar index has increased by more than 14 per cent, but has had a rough summer since hitting a 52-week high on June 5. Since early June, the index is off by almost 7 per cent. With the stock price now trading below both the 50-day and 21-day moving averages, the U.S. restaurant sector is looking oversold.
We will be using Recognia Strategy Builder to search for reasonably valued U.S. restaurant stocks after the recent sell-off.
We begin by setting a minimum market capitalization threshold of $1-billion (U.S.) to focus on larger restaurant chains in the market. Next, we will look for companies with reasonable valuations based on their forward price-to-earnings estimates. We will consider companies with forward P/E ratios of 25 or less based on this year's analyst estimates.
In order to focus on companies with strong track records of profitability and growing earnings, we will select only stocks with five-year average annual EPS growth rates of 5 per cent or more. And finally, to find stocks that have already seen significant price declines, we will screen for stock trading at least 10-per-cent off their 52-week highs.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Topping our list is Brinker International, parent company of Chili's and Maggiano's Little Italy restaurants. Brinker stock has had a tough run, down 37.2 per cent from its 52-week high achieved in late 2016. The stock now has a very low forward P/E ratio of just 11.3 and a dividend yield of 3.8 per cent (highest on our list).
The highest historical EPS growth rate on our list belongs to Dunkin' Brands Group, at 58.4 per cent. Despite an 11.4-per-cent drop from its 52-week high, Dunkin' Brands stock has fared very well over the past year, up 16 per cent in the past 12 months. The stock also has an attractive dividend yield of 2.4 per cent.
The largest company on our list is Darden Restaurants, parent company of some well-known restaurant chains such as the Olive Garden and the Capital Grille, with a market cap of $10.6-billion. The company announced fourth-quarter results in late June that beat analyst estimates for both revenue and earnings. The better than expected results were driven mainly by a turnaround at the chain's Olive Garden restaurants, which saw sales growth of 4.4 per cent over the same quarter a year ago.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.
Reasonably valued U.S. restaurant stocks
|Rank||Company||Symbol||Market Cap. ($Bil U.S.)||Forward P/E||EPS Growth Rate (5Y Historical)||Change from 52W High||Dividend Yield|
|1||Brinker International Inc.||EAT-N||$1.7||11.3||17.9%||-37.2%||3.8%|
|2||Bloomin Brands Inc.||BLMN-Q||$1.7||12.3||29.1%||-21.8%||1.8%|
|3||Cheesecake Factory Inc.||CAKE-Q||$2.3||15.5||12.0%||-29.8%||2.0%|
|4||Dunkin' Brands Group Inc.||DNKN-Q||$4.8||22.2||58.4%||-11.4%||2.4%|
|5||Jack In The Box Inc.||JACK-Q||$2.7||21.0||23.3%||-18.8%||1.7%|
|6||Buffalo Wild Wings Inc.||BWLD-Q||$1.7||20.8||14.0%||-35.2%||0.0%|
|7||Darden Restaurants Inc.||DRI-N||$10.6||21.2||19.0%||-11.2%||3.0%|
|8||Cracker Barrel Old Country Store Inc.||CBRL-Q||$3.7||18.9||16.9%||-11.0%||3.1%|