Restaurants’ buyout binge helps, and hurts, stocks

Three buyouts have lifted restaurants’ overall performance, but investors are not on board with everything, says RB’s The Bottom Line.
Photograph: Shutterstock

The Bottom Line

The buyout mania that has infected the restaurant industry in recent months has had an impact on the industry’s stock performance.

Three companies have recently agreed to be sold, or completed deals: Jamba Juice, Sonic and Zoes Kitchen. With those three buyouts, restaurants’ stock prices on average increased 1% in the last three months, and well over 13% for the year.

Without them, stocks declined 0.4% on average but have increased 12.5% for the year, according to a Restaurant Business analysis.

Speculation, meanwhile, has had an impact on some other stocks that haven’t been sold yet. Habit Burger, for instance, was the quarter’s strongest performer, with a stock price that was up nearly 50%.

A lot of that was due to the fast-casual burger chain’s second quarter performance. But plenty was also the result of speculation that the chain could be a buyout target.

There’s also Papa John’s, which was surprisingly flat in the quarter. Its stock was down just 1% in the past three months even though its founder and chairman acknowledged using the N-word during a conference call, resigned, was removed from the chain’s ads and then kick-started filing lawsuits.

A big reason why: Investors believe the company could get sold. And reports indicate that very well could happen.

Not everybody is on board with all of this, however.

Del Frisco’s Restaurant Group fell 35% during the quarter, and is down nearly 47% this year so far, despite selling Sullivan’s and buying the owner of Barcelona Wine Bar and Bartaco.

The performance of Del Frisco’s illustrates the wide variation of performance among stocks this year.

For the most part, 2018 has been good to the (shrinking) group of publicly traded restaurants. Thanks to an early-year surge in investor interest, they are up 12.5% on the year, on average, with a median increase of just less than 5%.

By contrast, the S&P 500 Index is up 9%.

Restaurant Stocks Winners and Losers

Source: Yahoo! Finance/Restaurant Business analysis

Investors earlier in the year jumped on board strong earnings reports and a belief that the industry was headed for improvement after two years of weakness. They’ve stepped back some amid concerns that chain restaurant sales aren’t meeting expectations, and fears about growing labor costs.

Here are some other notes on stocks so far this year:

Bandwagon jumping. Investors have crowded aboard some restaurant companies, notably Noodles & Co. and BJ’s Restaurants, both of which have doubled in value this year.

Noodles’ sales have turned positive, in part on its successful introduction of zucchini noodles back in May and the company’s improved profitability.

BJ’s, meanwhile, has seen sales return this year, proving consumers are still OK with casual dining. Mostly.

Fast casual is still where it’s at. Five of the six best performers so far this year are fast-casual companies: Noodles, Good Times, Wingstop, Habit and Chipotle have all seen stock prices increase by more than 50% this year. As a group, fast-casual chains’ stocks are up nearly 50%.

Wingstop has generated strong sales this year and is believed to be a potentially strong beneficiary of delivery.

Chipotle has a new CEO. You might have heard of him.

But investors are stepping back into casual dining. Thanks to some strong performances by BJ’s (91%), Dine Brands (up 49%) and Ruth’s Chris (up 40%), investors have jumped on board casual dining.

Of course, they’ve punished a few others, like Del Frisco’s and Red Robin, which is down 33% this year. But the median stock price for casual dining operators is up more than 11% this year.

Yum Brands’ quiet strength. It might not be as flashy or dramatic as Domino’s and doesn’t get the attention of McDonald’s, but the owner of Taco Bell, KFC and Pizza Hut has quietly been a consistent performer on Wall Street. The company hit an all-time high of $91.27 in September and has remained near that level.

Yum is up 10% on the year, better than its biggest QSR rivals, notably Wendy’s (up 3%), McDonald’s (down 4%) and Restaurant Brands International (down 5%).

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