Restaurant Stocks With Potential Upside

With the economy humming at healthy rates, consumers are finally starting to recover from the slump they were in following the 2008-2009 recession. Consumers now are finally having the disposable income again that they had in 2007 to spend wherever they desire. This has led to strong results from retailers such as Macy’s (M), Nordstroms (JWN), and L Brands (LTD), among others. That strength also has been seen in the IPO market as one of the hottest IPOs in recent memory has been specialty retailer, Michael Kors (KORS), a quick triple since the offering in late 2011.

Others gaining on the strong economy have been eateries, which particularly stand out as a number of them are trading at multi-year highs following the strong market recovery out of the slump in 2008-2009 time-frame. Here are three of my favorites:

Chipotle Mexican Grill (CMG) is a fast food restaurant but a little bit more differentiated than the other fast food places with its focus on quality. Here is a quick scoop on the company: Chipotle offers a focused menu of burritos, tacos, burrito bowls and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere. Chipotle is seeking better food from using ingredients that are not only fresh, but that—where possible—are sustainably grown responsibly raised with respect for the animals, the land, and the farmers who produce the food. A similarly focused people culture, with an emphasis on identifying and empowering top performing employees, enables us to develop future leaders from within. Chipotle opened with a single restaurant in 1993 and currently operates more than 1,500 restaurants.

Chipotle was one of the hottest stocks up 8 times from its 2009 lows. However, after breaking $400, the share collapsed almost 50% to $250 a share. But demonstrating its growth potential, the stock came back to the $400 it is trading at now. The restaurant has been one of the more popular new eateries on a national level and one of the more popular investments in growth stocks. William Blair, a research firm specializing in growth stocks, just listed Chipotle as one of their two favorite stocks, commenting that the firm remains heartened by strong midsingle-digit same-store traffic gains, with a likely price increase in the first half of 2014 poised to provide upward momentum to estimates, particularly as Chipotle has already absorbed significant commodity inflation that has increased its cost of sales to 33%-plus.

Brinker International (EAT) is one of the world's leading casual dining restaurant companies. Founded in 1975 and based in Dallas, Texas, Brinker currently owns, operates, or franchises 1,591 restaurants under the names Chili's Grill & Bar (1,547 restaurants) and Maggiano's Little Italy (44 restaurants).

Last quarterly results the company reported EPS growth of 26% y/y but some of the underlying growth trends were sluggish with most of the growth coming from continued operating leverage. Chili's, the biggest chunk of EAT’s business, domestic comparable restaurant sales decreased 0.3% percent for the quarter consisting of a 0.6% decrease for company-owned restaurants, partially offset by a 0.5% increase for franchised restaurants. However, despite the sluggishness, the company said that it is confident it will achieve its previously stated goal of doubling of its fiscal 2010 earnings per share next fiscal year, a full year ahead of schedule.

In other news, Brinker declared a quarterly dividend of $0.24 per share on the common stock, representing a 20% increase in the company's quarterly dividend. Brinker's Board of Directors also authorized an additional $200 million in share repurchases, bringing the total outstanding share repurchase authorization to approximately $480 million as of today's date. The announcement of additional share repurchases and an increased dividend shows that management has confidence in the future of its cash flows to return what it has in the bank to shareholders.

On a quick side note, these restaurants are also ready to profit from the ongoing tech trend sweeping the industry. That trend is online ordering. Online ordering is a rising trend, with approximately a quarter of U.S. take out restaurants already accepting food orders on the internet. This, according to a new research study by Cornell University entitled, “The Current State of Online Food Ordering in the U.S. Restaurant Industry.” One of the top benefits of ordering on the internet is a cutback in labor costs as well as better order volume and accuracy and a slight increase in the customers’ average bill.

E-Rewards Network (ERNI) specializes in this area as well as loyalty reward programs and may stand to benefit from tech trend hitting bricks and mortar food stores. The company just launched its loyalty program/online order platform and as of August 26, 2013, ERNI launched its program in selected areas of Brooklyn, Queens, Manhattan, and Long Island. The program, which had been in its pilot phase since February 2013, has garnered 2,000 registered members since its start -- a number that expects to grow to around 10,000 over the next few months. Management expects “explosive” growth, also undoubtedly looking to gain from the online ordering trend in restaurant.

The last restaurant stock listed here is Ruth’s Hospitality Group (RUTH), a leading restaurant company focused exclusively on the upscale dining segment. The company owns the Ruth’s Chris Steak House, Mitchell’s Fish Market, Mitchell’s Steakhouse and Cameron’s Steakhouse concepts. Ruth’s Hospitality Group, headquartered in Winter Park, Fla, was originally founded in 1965 and currently has more than 150 company- and franchisee-owned restaurants worldwide.

You can unequivocally say that Ruth’s shares collapsed in the 2009 downturn as shares at one point traded under $1 a share. However, the stock has come back strong as is now sitting at just under $12 a share, a testament to management and the company’s strong restaurant concepts. For the second quarter, RUTH recorded its 13th straight quarter of positive comparable sales growth and an 18% increase in our adjusted earnings per share. Compared to other eateries, RUTH is growing and management is excited about what the future holds with its focus on reinvesting capital in its business, suggesting that growing should continue for this restaurant stock.With stocks on a strong 5 year rally, most analysts stocks are close to fair value but for RUTH, analysts still expect upside with a price target of $14 on the shares.