Restaurant stocks, which I’ve discussed in previous editorials, often attract the favor of institutional investors and stock investing. For these kinds of companies, this is a risk-capital endeavor.
But when there is a material price retrenchment in a growing restaurant company, it’s worth more scrutiny.
This is especially the case in an equity market close to its all-time record high in a slow-growth environment. Finding double-digit growth in today’s world is not easy.
Stock Investing Example: Growing Company with a Proven Concept
Fiesta Restaurant Group, Inc. (NASDAQ/FRGI) is a seasoned operator of the “Pollo Tropical” and “Taco Cabana” chains. This is a growing company whose stocks are down currently. However, I think it’s worth a look for speculative investors.
Restaurant stocks are no different than the hottest technology issue—they trade off Wall Street expectations.
When a fast-growing business like Fiesta Restaurant Group doesn’t meet or beat the Street with conviction, the stock is going to take a hit. But that doesn’t mean that the company is no longer attractive. Fiesta Restaurant Group is a restaurant business with loads of potential going forward.
Strong Brands, Double-Digit Sales, and Earnings Growth
Any company can miss a quarter. And any stock can garner less favor among institutional investors where it did so previously. That’s the stock market—a secondary market pricing system using supply and demand to determine non-static prices.
Fiesta Restaurant Group generated 2015 first-quarter comparable sales growth of approximately 13% to $164 million.
Comparable restaurant sales at Pollo Tropical improved 6.4% in the first quarter, with Taco Cabana growing 3.8% over the same quarter last year.
The company opened 23 net new locations during the quarter, all of which are corporate-owned.
The bottom line grew to $10.5 million, or $0.39 per diluted share, compared to $8.7 million, or $0.33 per diluted share. Total Pollo Tropical sales grew 22% comparatively to $87.0 million, while Taco Cabana restaurant sales increased about four percent to $76.0 million.
Management cited an industry-wide trend that benefitted its bottom line. The company’s average check is still growing due to rising menu prices without affecting demand. This is a positive sign regarding consumers spending in this specific industry. (See “Best Micro-Cap Stocks for the Savvy Trader.”)
Fiesta Restaurant Group’s first-quarter total sales actually came in slightly below Wall Street consensus. A few months ago, the stock was trending agreeably higher; getting close to the $70.00 per share level. It’s now around $50.00, presenting an interesting turnaround opportunity.
Restaurant stocks are always an industry sector worthy of perusal by speculative investors. These stories are all about growth expectations. Thus, share prices trade around them accordingly.
In the specific case of Fiesta Restaurant Group, the stock’s recent sell-off is an opportunity in an enterprise still growing at an above-average rate.