Two Old Restaurant Stocks Offer Investors Growth

Two Old Restaurant Stocks Offer Investors GrowthThe last time we looked at Chipotle Mexican Grill, Inc. (CMG) in this column, the company was trading around $400.00 a share after blowing away Wall Street estimates in its second quarter.

The company’s numbers were excellent with 2013 second-quarter sales growth of 18% to $817 million, a 5.5% gain in comparable restaurant sales, and earnings-per-share growth of 10% to $2.82 a share.

In the second quarter, the company opened 44 new restaurants for a total of 1,502. Company management said that it expects comparable restaurant sales to be in the low to mid-single digits this year on between 165 and 180 net new locations.

Wall Street earnings estimates for Chipotle have mostly been going up for this fiscal year, but especially for 2014.

In its second quarter, expenses increased significantly, especially in the cost of food products. Company management cited higher costs for chicken and dairy products, and even for salsa due to a shortage of tomatillo in Mexico.

Labor costs as a percentage of revenues actually dropped compared to the second quarter of 2012, and so did occupancy costs.

Historically, Chipotle typically experiences lower average daily restaurant sales in the first and fourth quarters of the calendar year, due to the weather and holidays. In its upcoming financial report, the Street expects the company to generate approximately 22% in earnings growth and approximately 17% in quarterly sales growth.

Naturally, the stock is expensively priced because of this. Last year’s third quarter produced solid revenue growth of 18% to $700 million and diluted earnings per share grew 19.5% to $2.27 a share on comparable restaurant sales growth of 4.8%.

While the stock is pricey with a trailing price-to-earnings ratio of around 45, the company is providing genuine economic growth for investors. (See “New Restaurant Stocks Plentiful, but This Old Name Delivers.”)

The stock is trading right at its 52-week high and is close to its record price high set in April 2012.

Restaurant companies regularly experience operational issues that aren’t often related to general consumer spending. Changing consumer tastes and price wars can wreak havoc on operating margins. However, the equity market has proven that restaurant stocks are good wealth creators, and investors should always consider the sector as part of a diversified portfolio.

Right now, there’s value among a few struggling chains. Darden Restaurants, Inc. (DRI) is not a Wall Street favorite right now, but the stock is reasonably priced, and the company’s dividend yield is nearly five percent.

All it takes is one strong turnaround quarter for Darden and investors will pile in. It happened to Chipotle in the third quarter last year. However, it will probably take longer for Darden, but the position definitely offers value.

In this stock market, I favor existing winners.

Chipotle reports its third-quarter earnings on October 17.