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Time To Fill Up On Restaurant Chains?

Posted: Apr 06, 2009 08:25 AM by Glenn Curtis

Tickers in this Article: MCD, BKC, DIN, EAT, DRI

Over the last year, a lot has been written about the strength of fast food stocks - in particular, McDonald's (NYSE:MCD) and Burger King (NYSE:BKC). However, there is also a lot to say in regards to sit-down, family restaurants. Some of the more popular companies include Darden (NYSE:DRI), Brinker International (NYSE:EAT) and DineEquity (NYSE:DIN).

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DineEquity
The company with the Applebee's and IHOP concepts under its belt has seen its stock rebound pretty sharply over the last month or so. It's also coming off of a quarter where it handily beat the analysts' earnings estimate. Actually, a gander at data supplied by Thomson Financial Networks reveals that the company has exceeded analyst estimates in three of the last four reported quarters. <INVESTOPEDIACONTENT>(Find out more about the food industry in Sinking Your Teeth Into Restaurant Stocks.)
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However, looking back in the fourth quarter, the company reported that same-store-sales at IHOP were down 1%. Meanwhile, according to the fourth-quarter release, "Applebee's system-wide domestic same-store sales decreased 4.6% for the fourth quarter 2008."

At a glance, DineEquity doesn't appear very cheap. It trades at about 18 times the current year (2009) estimate of 83 cents. However, in 2010 it is expected to earn 97 cents, which implies an expected growth rate during that period in excess of 17%. Whether or not this is doable is still up for debate. However, if it does hit that mark, the shares could trade higher.

Brinker
Brinker's Chili's chain has actually beaten estimates in two of the last four reported quarters, including its most recently reported quarter. It is also interesting to note that an executive, Roger Thomson, purchased 2,500 shares on March 5, increasing his holdings by 3%. That sure seems like a good sign.

Brinker trades at about 14 times the current year estimate of $1.13. That's not too shabby, given that the company is also, according to Yahoo! Finance, expected to grow nearly 11% per annum in the next five years.

The forward yield is about 2.9%. That's not huge, but it's still a pretty decent number, given the current environment. Keep in mind that dividends are never guaranteed. (Discover the issues that complicate these payouts for investors in Dividend Facts You May Not Know.)

Darden
A quick look at the data provided by Thomson Financial Networks shows that the company, known best for its Olive Garden and Red Lobster chains, actually exceeded estimates in three of the last four reported quarters. It is also expected to have a pretty hefty $2.70 earnings per share in its current year ending in May of 2009. It trades at about 13 times the $2.70 estimate. That's a pretty good deal, given that the same data also indicates that it is expected to grow more than 12% per annum in the next five years. (EPS helps investors analyze earnings in relation to changes in new-share capital, read Getting The Real Earnings.)

The chain also did something that seemingly not a lot of companies have been doing these days – it upped its outlook for 2009. According to a March 17 Reuters article, "Darden now expects 2009 per-share profit to stay flat to 3% down from the year before, excluding special items. That compares with a previous forecast calling for 2009 earnings per share to slide 5-10%."

One thing I would like to see however is a little open market buying by insiders.

The Bottom Line
Full service restaurants will be ringing the register again in a serious way, at some point. For that reason the aforementioned companies deserve a spot on the radar screen.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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