As incredible as it may be, Chipotle Mexican Grill, Inc. (CMG) recently spiked above $600.00 a share and is now closing in on $700.00. This position could no doubt benefit from a share split.
The stock is trading with a forward price-to-earnings (P/E) ratio of approximately 40, and the company’s earnings estimates for this fiscal year and next continue to tick higher.
A more aggressive portfolio of stocks is typically well served by exposure to the restaurant sector. Many chains are consistently good earners, but you can’t get too attached to any positions; consumer tastes change and competition is fierce.
Restaurant stocks also experience waves of enthusiasm on the part of investors and because of this, you can actually find value among established brands.
Darden Restaurants, Inc. (DRI) is the owner of the “Olive Garden” and “LongHorn Steakhouse” chains. The company recently sold “Red Lobster” for $2.1 billion in cash, using $1.0 billion to pay down its debt with the rest to be spent on share repurchases.
This stock hasn’t done much over the last couple of years due to operational problems, but it now boasts a dividend yield of just less than five percent and is not expensively priced.
Value among restaurant stocks can also be found with Cracker Barrel Old Country Store, Inc. (CBRL).
This position has been flat since February, and its dividend yield has now crept above the four-percent level.
The company should soon report its financial results for its fiscal fourth quarter of 2014. In its third fiscal quarter (ended May 2, 2014), Cracker Barrel’s revenues grew 0.5% over the comparable quarter to $643 million. Earnings grew 17% to $25.7 million, or $1.20 per diluted share, up from $24.6 million, or $1.02 per diluted share, in the comparable quarter. (See “One Group of Stocks Every Portfolio Should Have.”)
Revenue from the company’s store items typically represents about 18% of the total. Cracker Barrel has lots of cash in the bank, and management recently approved a 33% increase to its quarterly dividend.
Restaurant stocks can definitely be volatile as operational problems, changing tastes, food costs (usually the biggest expense), and consumer spending directly affect the bottom line.
But institutional investors consistently bid these stocks when operations turn around. With this potential and a higher-than-average dividend yield, both Cracker Barrel and Darden Restaurants now seem attractive.
There is a reason why stocks like Chipotle Mexican Grill can be so expensively priced.
The company had an excellent second quarter, producing revenue growth of 29% to $1.05 billion. Earnings grew 26% to $110.3 million, which is very good profitability for a restaurant enterprise with 45 new locations having opened during the quarter.
Restaurant stocks do experience the impact of a herd mentality among investors, and growth stories, like Chipotle Mexican Grill, tend to get way overpriced.
But they often remain that way until there is a dramatic change in operational growth. With increasing traffic and an increasing average check, I wouldn’t be surprised at all if this stock sails past $700.00 a share for a new breakout.
With the current wave of enthusiasm passing through these restaurant stocks, investors can find value in this sector.