Restaurants for Steady Returns

Is it time to pick up restaurant stocks?

In a weak economy, struggling to generate demand for goods and services, consumer confidence seems to be at a low ebb and it is only natural to expect discretionary public spending to remain weak in the near future. The restaurant industry has been battered by the ill-effects of an acute recession in the US.

As a direct fallout, several restaurant chains have either gone out of business or have been compelled to reduce their store count to cut costs. One man’s loss is an opportunity for another as an article in the Wall Street Journal pointed out.

Despite a gloomy Moody’s update in May 2009 on the outlook for the US restaurant industry which stated that “…weak consumer and business spending trends and greater competitive pressures will significantly outweigh commodity cost deflation and cost-saving initiatives over the next 12 to 18 months,” seasoned investors see merit in restaurant stocks which have historically earned profits and generated shareholder value. Investors with a time horizon of 12-18 months can expect excellent capital appreciation.

The stocks, which are likely to perform well in the next two years and are available at reasonable valuations are:

Sonic (Nasdaq: SONC)-America’s Drive-in, Sonic, America’s Drive-In, originally started as a hamburger and root beer stand in 1953 in Shawnee, Okla., called Top Hat Drive-In, and then changed its name to Sonic in 1959. The first drive-in to adopt the Sonic name is still serving customers in Stillwater, Okla. Sonic has more than 3,500 drive-ins coast to coast, where more than a million customers eat every day. (Source: Company press release)

Its 52-week high was $18.19 and low was $5.78. Price on June 15, 2009 was $8.85. Analysts expect the company to report better same-store sales in 2009 and its annual earnings growth is expected to be in double digits in 2010 against negative growth of 31 percent in 2009. Its third quarter results are due on June 23, 2009. (Source: Forbes)

Panera Bread (Nasdaq: PNRA)- The Company and its subsidiaries operate a retail bakery-cafe business and franchising business under the concept names Panera Bread(r), Saint Louis Bread Co.(r), and Paradise Bakery & Cafe(r).

Its 52-week high was $65.33 and low was $34.22. Price on June 15, 2009 was $50.53. Analysts expect its earnings growth to be 18.7 percent  in 2009 and 13.7 percent in 2010. (Source: Forbes)

Darden Restaurants (NYSE: DRI)- A publicly held casual dining restaurant company that operates Red Lobster, Olive Garden, Bahamas Breeze, Smokey Bones Barbeque & Grill and Seasons restaurants. The company owns and operates all of the restaurants in the United States and Canada.

Its 52-week high and low prices were $41.21 and $13.21 respectively. Its price on June 15, 2009 was $33.87. It is expected to clock earnings growth of 7.5 percent against negative growth forecast of 1.2 percent in 2009.

Its fourth quarter conference call is due on June 24, 2009 to announce results. (Source: Forbes)

The difficult times that we are in today offers great opportunities for restaurant chains with a cash-positive balance sheet as they can get bargain deals to use extinct stores to expand their business. As the Wall Street report shows- Panera Bread will open a series of its outlets at some of Bennigan’s locations, the parent of a bar-and-grill chain.

As and when the economy recovers, restaurant companies with resilient brands and a strong balance sheet would be able to offer value for money to discerning customers.