OPINIONFinancing

Investors lose some faith in QSR

The industry appears to be outperforming the stock market, but not fast-food chains, says RB's The Bottom Line.

Investors seem to have lost their taste for fast-food restaurants.

Publicly traded quick-service restaurants’ stocks have fallen nearly 5% on average so far this year, according to Restaurant Business calculations. The performance is worse than the industry as a whole, and the broader stock market.

To be sure, stocks have had a rough year. The S&P 500 index is down more than 4% so far in 2018. Concerns about a potential trade war and a technology backlash, among other things, have led to a lot of volatility on Wall Street. The S&P fell more than 2% on Monday alone.

Restaurants haven’t fared much better. Through close on Monday, the median stock price decline was just more than 2% so far this year—not counting companies such as Bravo Brio Restaurant Group and Fogo de Chao, both of which are being sold. Most stocks have declined so far this year.

While that might be better than the broader market, the industry is also coming off a difficult 2017 in which investors shifted a lot of their money to safer, bigger names. The median price last year declined by 4.7%.

But that decline also brought down valuations, which helped lead to deals for Bravo Brio and Fogo. Investors are picking potential winners among what’s left.

For instance, they appear to be betting that Noodles & Co. will have a good year. It’s been the best-performing stock among restaurants so far this year, up 38%.

And many casual-dining names have gained favor with Wall Street.

In particular, Dine Brands Global, the company formerly known as DineEquity that owns Applebee’s and IHOP, is up nearly 27% this year through close on Monday, plus another 3% through late morning on Tuesday.

The company has gained favor with investors largely because of same-store sales and traffic growth at Applebee’s.

Two other casual-dining names have performed well: BJ’s Restaurants, which is up 21% this year, and Nashville-based J. Alexander’s, which is up nearly 18%.

Meanwhile, Domino’s Pizza—the best-performing restaurant stock for the past decade—is up 22% this year on an already sky-high valuation.

Top Stocks 1Q 2018

On the other end so far this year is Dave & Buster’s, the food and games chain that has been struggling with lost customers in recent months. It’s down more than 27% through Monday.

But it’s the quick-service names that have really struggled so far this year.

Only three of the 12 quick-service companies on Wall Street are up so far this year: Bojangles’, rumored to be a potential takeover target, is up 13.6%; Wendy’s and Taco Bell owner Yum Brands are both up 3%.

McDonald’s, the best-performing industry stock last year, is down more than 8% this year amid concerns that its new $1 $2 $3 Dollar Menu hasn’t enamored consumers early in 2018.

Jack in the Box is down more than 14% following the sale of Qdoba, and Del Taco is down more than 15%.

Burger King owner Restaurant Brands International is down more than 8%.

Worst Stocks 1Q 2018

While the industry’s performance so far this year is coming amid a generally weak stock market, the performance is still bringing down valuations that were already depressed relative to the high prices many private buyers are willing to pay for acquisitions.

That could lead to more acquisitions among the publicly traded set, similar to the take-private deals for Fogo and Bravo Brio.

That said, restaurant industry performance on Wall Street is understandably weak, given its generally weak same-store sales results early in 2018, as well as continued concern about shifting spending.

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