4 restaurant stocks to sell now

It may be a good time to get out of the Golden Arches and put your money into a more profitable sector.

By Benzinga Sep 24, 2013 2:29PM

A sign outside the fast-food chain McDonaldBy Nelson Hem


New research from Oppenheimer suggests that many leisure stocks may be overpriced. The analysts suggest that investors may want to sell the following four restaurant stocks now in order to rotate into more profitable sectors, such as energy or materials. 


Below we take a look at how Darden Restaurants (DRI), McDonald's (MCD), Panera Bread (PNRA) and Ruby Tuesday (RT) have fared and what analysts in general expect from them.


Note that the Oppenheimer team also singled out Carnival (CCL), Marriott International (MAR) and Wynn Resorts (WYNN) in this research report.


Darden Restaurants

This operator of the Red Lobster, Olive Garden and other chains recently reported falling earnings that missed consensus estimates. Darden sports a market capitalization near $6 billion and offers a dividend yield near 4.8%. Its long-term earnings per share (EPS) growth forecast is only about 5%.


Only 10 of the 28 analysts surveyed by Thomson/First Call recommend buying shares. The mean price target, or where analysts expect the share price to go, is more than 8% higher than the current share price. Note that shares were trading higher than that target as recently as July.


Shares have dropped more than 6% in the past week, and the share price is more than 18% lower than a year ago. Over the past six months, the stock has not only underperformed the broader markets, but competitor DineEquity (DIN) as well.


McDonald's

The decline in the most recent Restaurant Performance Index was seen as bad news for likes of this fast-food giant. The more than $98 billion market cap company offers about a 3.3% dividend yield. The long-term EPS growth forecast is less than 9%, but the return on equity is about 37%.


Fifteen of the 27 surveyed analysts recommend holding shares, while the rest recommend buying them. The analysts see some headroom for shares, as their mean price target is more than 6% higher than the current share price. That consensus target would be a new multiyear high.


Shares have traded mostly between $95 and $100 this summer and are in the same neighborhood they were six months ago. The stock has underperformed smaller competitors Burger King Worldwide (BKW) and Yum! Brands (YUM), as well as the broader markets, over the past six months.


Panera Bread

The CEO of this operator of bakery-cafes has been trying to feed himself on $4.50 a day to bring awareness to the problem of hunger. Panera's market cap is almost $5 billion. Its price-to-earnings (P/E) ratio is a bit higher than the industry average. Short interest is about 6% of the float.


Of the 24 analysts polled, 14 recommend buying shares and two rate them at underperform. The analysts see some headroom for shares, as their mean price target is more than 10% higher than the current share price. But that is less than the 52-week high reached in late May.


The share price is almost 13% lower than that 52-week high, as well as up less than 3% year-to-date. Over the past six months, this stock has underperformed competitors Einstein Noah Restaurant (BAGL) and Starbucks (SBUX), as well as the broader markets.


Ruby Tuesday

This struggling casual dining restaurant operator fell short on both the top and bottom lines in its most recent quarterly report. Its market cap is about $560 million. The return on equity is in the red, though the operating margin is less than the industry average. Short interest is about 4% of the float.


The consensus recommendation is to hold shares; none of the analysts who were surveyed recommends buying them. The mean price target is lower than the current share price, indicating that the analysts see no potential upside at this time.


The share price plunged following the disappointing quarterly report back in July and has not recovered. It is less than 3% higher than six months ago. Yet Ruby Tuesday has outperformed Darden Restaurants and DineEquity in that time, though it underperformed the broader markets.

 


At the time of this writing, the author had no position in the mentioned equities.


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2Comments
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The problem of hunger? In America? How about we stop giving other country's our money. That might work.

The CEO of Panera acting like he gives a care. Pathetic. At least if it makes him feel bad, he can a nice massage and relax in his jacuzzi. Poor fella.

Sep 24, 2013 11:42PM
avatar
Don't be fooled America. So far, anybody who doesn't have their youthful years still intact is somewhat foolish to think that our fast food giants are improving the healthfulness of their offerings to a significant extent really. If you put yourself in my position, you will find that America's fast food machine seems to discriminate against you due to the fact maybe that you fell in with some kids from broken homes or others who liked to party a lot and Casey Jones was driving his train high on cocaine. One night you ended up at a great party, someone who knew someone who worked at a local dispensary in a hospital got their hands on some pharmaceutical speed in a vile and decided to go to the party and teach everyone how to shoot drugs. For doing this when you were 14 and ill-supervised, you began a life of exploring a new playground others regarded as experimenting with drugs. It was cool and you felt accepted. Because you were lost, got hepatitis C somewhere along the line and got sick, and then were neurologically damaged and your liver functionality reduced by some bad percentage through the treatment for your disease, you can't tolerate food unless the fat calories percent is 10% or less of total calories or you're about to wretch most of the time. Shame on us for living through the late 1960s, the 1970s and the influence of MK Ultra, et al. I guess we should be glad to be alive right? We want to eat at the McDonalds, but we can't, but they believe that absolute capitalism is the key to life or something. It's the or something me thinks.
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