Restaurant Stocks Will Boom In The Second Half
Restaurant stocks have been a mixed bag over the past year or so. Those with drive-through exposure or delivery capabilities were able to weather the pandemic and even grow their businesses while those without were not.
That story is changing, however, with the economic reopening as more and more restaurants are seeing a boom in business.
Based on what we've seen simply around our own areas it looks like restaurants are operating at pre-pandemic levels, if not above. That alone is enough to get us interested in the group. Add to that some incredibly low valuations and an increasingly bullish analyst community, and we see the opportunity for high double-digit gains in the second half of the year.
Raymond James Gets Bullish On Full Service Restaurant Stocks
Analyst Brian Vaccaro and his team at Raymond James called out attractive entry points in both 1. Cheesecake Factory (NASDAQ:CAKE) and 2. Brinker International (NYSE:EAT).
With both stocks down more than 20% from recent highs, they're viewed as undervalued and with a very positive revenue outlook. The team upgraded both stocks to Outperform from Market Perform and set price targets for both.
The price target for Cheesecake Factory is $60 and represents about a 16% upside compared to the broad consensus of $53.
The target for Brinker International is far more interesting. The $75 target represents a 25% upside compared to the consensus for roughly 15% upside and, in our view, both targets are underestimating the power of the rebound and the potential for revenue and earnings to beat the consensus.
"We believe many full-service restaurant stocks are worth a fresh look as the group's pullback through 2Q has created (once again) attractive valuation entry points ahead of what we expect will be a very strong 2Q earnings season. The industry’s strong sales recovery that emerged since mid-March sustained through 2Q, and seemed to accelerate a bit moving through June."
One of the analysts called out Cheesecake Factory as one of its best ideas. They think the fears of food cost and labor inflation are overblown and see the elimination of convertible preferred stock as being very accretive.
The company issued some new debt and sold some shares to raise capital over the quarter and used that money to reposition its capital structure and reduce some of its higher-cost debt. We view both moves as very positive for the company both in the near term and for the long term.
The Cheesecake Factory reports on July 27 and Brinker International on August 11. Both are expected to deliver robust results.
While both are expected to show sequential and year-over-year growth, we think the two-year comparison is the most important.
Brinker is expected to grow by 18% over the 2019 calendar second quarter while Cheesecake Factory is expected to grow 23% versus the same time frame.
A Budding Opportunity In Bloomin Brands
Our third contender, Bloomin Brands (NASDAQ:BLMN), is another full-service restaurant on the brink of a major rebound in revenue and earnings. Jefferies just called it out as one of its favorite small or mid-cap stocks and points to what it expects to be a period of outperformance for the entire group.
The firm notes the average period of small-cap outperformance is about 5 years which makes this a long-term trade indeed.
Analyst Alex Slagle sees Bloomin Brands as the top value in the restaurant sector due to its management and positioning within the market. Jefferies did not assign a price target to the stock but its support has helped price action put in a bottom.
The current consensus is expecting about 10% of upside but we think 20% is the minimum that investors should expect.
Bloomin Brands and its large-cap competitors are well-positioned to grab market share during the reopening. They, of all the restaurant businesses, are in the best position to attract and retain the employees needed to operate and that will make all the difference.
