5 Restaurant Stocks Whose Earnings Estimates Deserve a Closer Look


David Marino-Nachison

Mar 07, 2019

Wall Street analysts are scaling back their outlooks for restaurant stocks -- even though some of these stocks seem keep going up anyway. New research suggests their climb can't continue.

     Two-thirds of the top 30 restaurant stocks by market cap have seen earnings estimates lowered over the last four quarters, Gordon Haskett analyst Jeff Farmer wrote Thursday. But industry share prices have risen nearly 9%, outperforming the S&P 500, over the last year.

     "Restaurant sector Street earnings before interest, taxes, depreciation and amortization and earnings per share estimates are moving lower, but share prices are going up -- a dynamic that precedent strongly suggests is unlikely to persist," Farmer wrote.

     The analyst highlighted five restaurant stocks where he thought share price and earnings revision trends warranted investors' attention:

     -- Chipotle Mexican Grill (CMG), are up 90% over the last year, thanks in part to the restaurant's same-store sales gains. But the shares' climb has been notably faster than the pace of increases to earnings estimates, Farmer notes.

     "We continue to believe that trading at more than 20 times estimated 2020 Ebitda -- Chipotle's share price appreciation has materially outpaced the company's far more modest upward revision trends with 2019 Street Ebitda and EPS estimates both up less than 5% since June 2018," he wrote.

     -- Bloomin' Brands (BLMN) stock is off about 13% over the last 12 months. Though the stock has a relatively inexpensive valuation compared with others in the sector, that could soon change, Farmer says.

     The company, trading "at just 7.1 times 2020 estimated Ebitda, has consistently traded at a healthy valuation discount to the peer group -- a discount that we expect to narrow in coming quarters with the company delivering continued market share gains, stabilizing margin compression and driving improved free cash flow conversion," Farmer wrote.

     -- Papa John's International (PZZA) and Red Robin Gourmet Burgers (RRGB) have both seen four straight quarters of downward 2019 Ebitda, EPS, and same-store sales revisions, according to Farmer.

     "In the case of Red Robin," he wrote, "this revision trend appears to at least partially explain why the stock's share price performance over the trailing 12 months (down 49%) materially outpaces the downward Ebitda revision (down 17%) over the same time period."

     Papa John's stock is down some 25% over the last 12 months. It has attracted the attention of activist investors.

     -- Texas Roadhouse (TXRH) stock is up roughly 4% over the last 12 months.

     The company "is rare in that it has seen a three-quarter run of downward revisions to both 2019 Ebitda and EPS despite healthy upward same-store sales revisions over the same time period," Farmer wrote. He called it a reflection of its investments in its business and wage-rate inflation.