Investors, eat up these 3 restaurant stocks

This is no longer a jobless recovery. Spending at restaurants likely to rise.

By Jamie Dlugosch Apr 2, 2010 11:39AM

Cheap dining © IT Stock Free/SuperStockLast week investors received great news in the form of a very strong employment report. In March, the economy added the most jobs in three years.


Already fueling a solid economic recovery, the consumer will rejoice in these numbers. Spending is likely to gradually rise as a result.



Where do consumers like to spend hard earned dollars?


Restaurants are always a great place to start. Who doesn’t enjoy winding down at a great restaurant after a long day of work?


No pots and pans to worry about. Sit back and relax in gastrointestinal heaven.


Restaurants and Institutions recently released their top 100 highest grossing independent restaurants. In the report it was noted that sales were down 13% as compared to 2009.


Looking forward where should investors expect to get the biggest bang for their buck?


Publicly-traded restaurant stocks have been doing quite well in the past year. Shares across the board have been on the rise as diners return to previously abandoned restaurants.


What restaurant stocks are poised for big gains for the rest of 2010?


In analyzing the space I found two key themes for investors to follow. On one hand I would look to own larger chain restaurants that are priced attractively. Strong returns can be had by doing so.


The second theme would be to own stocks likely to be acquired by a larger conglomerate. In this case investors would benefit in a recovery story in which a takeover bid is made at a higher price.


Here are 3 names to consider:


Darden Restaurants (DRI)


One of the largest chain restaurant operators in the country is Darden Restaurants (DRI). Its brands include Olive Garden, Red Lobster and The Capital Grille. With a cross section of offerings Darden has been able to withstand the recession with relative ease. Shares trade above pre-recessionary levels and are poised for more growth as the economy recovers.


Analysts expect the company to make $2.93 per share in the fiscal year 2010, ending May 31. A big jump in share price in March puts Darden at a 15 multiple. Expectations are for the company to grow earnings in the low double digits. The play in DRI today is a speculation on the company beating current estimates. Given the valuation, the downside risk is minimal.


Yum Brands (YUM)


During a recession consumers spend less. In the restaurant space those catering to tight budgets have done relatively well. Specifically, offering convenience at very low prices is a formula for success. Yum Brands (YUM) and its KFC, Taco Bell and Pizza Hut units are growing nicely out of this recession.



Analysts are looking for Yum to make a profit of $2.40 per share in the current year. If Yum does indeed meet expectations that result would be a 42% improvement on last year’s results. Investors can buy that growth for less than 15 times 2010 estimated earnings. That is a bargain in my book.


Morton’s Restaurant Group (MRT)


Looking for a takeover target in the restaurant space? Consider high-end steakhouse Morton's Restaurant Group (MRT). The chain is emerging from a very challenging operating environment. Unlike the budget restaurants, the high-end steakhouse struggle mightily during the recession. Morton’s was forced to close stores and batten down the hatches during the period.


Its efforts are paying off as a recovery emerges. Recently the company announced its outlook for the year that topped analyst expectations. The company expects to make a profit of $.25 to $.30 per share excluding items in 2010. Shares have been recovering since bottoming a year ago. At the current price of $6 per share MRT is well below previous highs. The ingredients are in place for a potential take-over. A strong brand executing a turn around would be attractive to any larger player depending on price. That price obviously would be well above current levels.


All three of these restaurant stocks will likely do better than expected. Estimates at the beginning of a new recovery often miss the mark as pessimism and fear rule the day. Look for these stocks to do well in the next 12 months as results beat expectations.


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