The restaurant industry regained momentum toward the end of 2014 after losing their footing at the beginning of the year. The upside came on the back of better job prospects, stepped-up economic activities, better-than-expected GDP numbers, improved business, and renewed optimism as a result of the housing recovery. Rising wages and cheaper fuel in the second part of the year were the other positives. In fact, the economy recorded back-to-back quarters of strong growth in over a decade and is now well on track for the best annual job growth rate since late 1999.
With improving consumer sentiment, a number of restaurant companies witnessed improved comps and traffic mainly in the second part of 2014. Same store sales were up 0.8% year over year in 2014 as against a 0.1% decline recorded in 2013. Same store traffic for the month of December grew 0.6%, the highest since Feb 2012. This reflects a real improvement in sales and not just the impact of rising prices.
Notably, analysts expect that the U.S. economy should sustain the growth seen in 2014 in 2015 and do even better. Restaurateurs on their part are trying to boost sales through diverse initiatives and in the process striving to bring the best to the table. In fact, per restaurant analysts, operators must offer more choices, deliver on customization and fresh ingredients, use different preparation styles, and focus more on quality because this is what discerning consumers want. They also believe that food chains which adopt quick technology enhancements are likely to find favor with convenience-seeking consumers. We believe that restaurant chains are leaving no stone unturned to live up to customers’ expectations.
Per National Restaurant Association (NRA), the restaurant industry is expected to generate sales worth $709.0 billion in 2015, up 3.5% year over year – marking the sixth consecutive year of real sales growth. However, NRA expects the operating environment to remain challenging due to slower-than-normal economic recovery after the recession as well as rising costs. Products like cheese, beef, bacon, avocado, pork and coffee are some of the key ingredients whose prices have touched record highs in 2014 and unfortunately the situation is not expected to improve in the near term.
Meanwhile, inclement weather in the country could once again impede growth in the first quarter of 2015 as it did in the first quarter of last year. Amid these ups and downs, we have picked four restaurant stocks that may stand out this season.
How to Pick the Right Stocks?
Choosing the right stocks could be quite difficult unless one knows the right method. One way of doing so is by selecting stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise in their upcoming earnings announcements. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, chances of a positive earnings surprise are as high as 70%.
For investors seeking to apply this strategy to their portfolio, we have highlighted four restaurant stocks that may stand out this season.
Based in Colorado, Chipotle Mexican Grill Inc (NYSE:CMG) has a Zacks Rank #2 (Buy) and an Earnings ESP of +3.18%. The Zacks Consensus Estimate for the fourth quarter is pegged at $3.77 per share. The company is scheduled to report fourth quarter and full year 2014 results on Feb 3, 2015.
Chipotle is well known for serving antibiotic-free meat and organic produce. The company has been witnessing a fairly stable traffic trend over the past few years driven by its strong market position, menu launches and increased media exposure.
El Pollo Loco Holdings Inc (NASDAQ:LOCO) has a Zacks Rank #2 and an Earnings ESP of +8.33%. The Zacks Consensus Estimate for the fourth quarter is pegged at 12 cents per share. Shares of this fire-roasted chicken specialist company have gained 9% since it began trading in Jul 2014. Besides providing its signature fire grilled chicken, the company creates unique items, which include less than 500 calorie menus for health conscious customers and customized meals.
Based in Colorado, Noodles & C (NASDAQ:NDLS) has a Zacks Rank #2 and an Earnings ESP of +7.14%. The Zacks Consensus Estimate for the fourth quarter is pegged at 14 cents per share.
Besides offering a wide menu, which includes spicy Indonesian peanut sauté, macaroni and cheese, a great line of healthy soups, salads, and whole-grain pasta choices, this fast casual restaurant also offers off-premise catering programs to capitalize on increasing demand for its products. The company is expected to announce its fourth quarter and 2014 results in the last week of February.
DineEquity Inc (NYSE:DIN) has a Zacks Rank #2 and an Earnings ESP of +6.14%. The Zacks Consensus Estimate for the fourth quarter is pegged at $1.14 per share. The company is expected to report fourth quarter and full year 2014 results in the last week of Feb 2015. This California based company is also working on menu positioning and has developed a pipeline of new items that is expected to be rolled out in 2015.
Bottom Line
While the restaurant industry has improved dramatically, we would like to wait for some more consistent improvement, going forward. Investors could definitely take advantage of the near-term opportunities to cash in on the turnaround in the restaurant sector. However, inflating food costs can adversely impact the industry’s performance. Also, a hike in menu prices as a result of the rising food costs could impact traffic trends.
One other concerning factor is the extremely cold weather in the country that could affect restaurant traffic in restaurants as it did in the first quarter of 2014. Let us see how the earnings season unfolds for these industry players.