Profits to go — fast food for investors
Restaurants have taken a beating, says one U.S. advisory, but that has created some bargain buys, including Canada’s favourite coffee shop.
Coffee and donuts. In the hockey season, they’re almost as essential as sticks, shoulder pads and cheering grandmothers.
But are they also food for an investor’s portfolio? Apparently so, according to one leading American advisory.
Restaurants have had a very empty feeling during the financial crisis, says Personal Finance. But with their share prices and market valuations knocked down, some popular restaurants look appetizing for investors.
It helps if the restaurants have an international presence. And one of the advisory’s top picks happens to Canada’s most notable coffee haven.
Yet another owns a series of franchises that can be found on any shopping strip in North America.
There are two more recommendations. If you’ve spent much time on the highways and byways of America, you may know these two as well.
Being finicky
The National Restaurant Association in the U.S. estimates that inflation-adjusted sales fell 1.2 per cent in 2008, says Mr. Peter Staas, writing for the advisory. “And any relief afforded by lower food and gasoline prices will be more than offset by reduced customer traffic and lower average checks.”
Restaurants are caught in a vicious circle. They have fewer customers, and that has caused them to cut prices and spend more on promotions to try and lure customers back.
The result of all this, says the author, is that valuations for restaurant stocks are at very attractive levels. Any good news could bring about a rally in these undervalued stocks.
And restaurants with international reach offer some growth prospects, says Mr. Staas. “As always, being finicky is the key to bargain hunting.”
We’ll start in the drive-thru line at Tim’s.
Half as many as Tim’s
You didn’t need this advisory to tell you that Tim Hortons (TSX/NYSE-THI) is the largest quick-service chain in Canada. The country’s second largest chain — McDonald’s in case you didn’t know — has only half as many locations as Tim’s 29,000.
“Offering doughnuts, coffee, soups and sandwiches, the firm continues to benefit from Canada’s resilient economy and managed to grow same-store sales 1.7 per cent last quarter,” explains Mr. Staas.
Tim Hortons has been expanding into the U.S. for several years, with mixed results. But in the last quarter, same-store sales in America rose by 4.3 per cent, so “expansion plans appear to be panning out better than expected,” says Mr. Staas.
Close to 99 per cent of Tim Hortons locations are franchised, adds the author, which creates reliable income streams in addition to the royalties paid. An interest in about 80 per cent of the real estate under the locations generates rent, “while a bakery, coffee-roasting facilities and five distribution centers supply franchises and provide consistent income as well as opportunity to sell to grocery store chains.”
With “ample opportunity” to expand on both sides of the border, Tim Hortons is a buy up to US$35, he concludes. It’s at $29.16 in New York, $30 in Toronto.
Hot stuff in China
Yum Brands (NYSE-YUM) may not mean anything to you, but Taco Bell, Pizza Hut and Kentucky Fried Chicken (or KFC, as it’s known today) cannot possibly have escaped your notice.
Same-store sales for these chains were down 6 per cent in the U.S. in the last quarter, and flat in China. But the company added units and reduced costs, which enabled it to beat earnings estimates.
The company has shown that it knows how to compete at home and abroad, Mr. Staas informs us. It has over 3,000 locations in China and expects that market to account for 38 per cent of its operating income this year. Evidently, Mexican, Italian and southern fast food is hot stuff in the Middle Kingdom. Buy Yum up to US$40, says the author. It’s at $35.61.
$1 cheeseburgers and Dolly Parton
Jack in the Box (NASDQ-JACK) has a big advertising campaign featuring an otherwise normal guy with a jack-in-the-box head. This is its reply to the fierce competition in the fast food field.
This company has over 2,200 hamburger locations in the American south and west. It also has an “up-and-coming” chain, Qdoba Mexican Grill.
“Rising unemployment among two key customer groups, teens and Hispanic Americans, has weighed on the company’s results,” says Mr. Staas. That’s why the ads are now pushing a $1 “Big Cheeseburger” promotion, its first foray into $1 menu items.
Jack’s is undertaking a big re-franchising campaign, the author says. Plus it has a more varied menu (teriyaki chicken bowls, etc.) than much of the competition. Trading at less than 10 times earnings, the stock has plenty of “long-term upside” and is a buy under US$24. It’s at $19.19.
The riskiest of the advisory’s four picks is Cracker Barrel Old Country Store (NASDQ-CBRL), a familiar sight along interstate highways. Its food is inexpensive — the average check is $8.84.
That means it could undercut some of the competition. And it has cut its own costs, like so many chains. On the other hand, its sales fell off by 3.8 per cent last quarter. It’s also trying to pay down debt.
Still, Cracker Barrel has a unique format and a dedicated customer base. “That helps to lower advertising costs,” says Mr. Staas, “while exclusive CD releases by Dolly Parton, Alan Jackson and other country artists continue to lure customers to the store.”
The advisory thinks this stock is worth a try under US$42. It’s trading today at $38.31.
A few years ago, we sat in a long drive-thru line in a Tim Hortons just south of Columbus, Ohio. Today, all those folks could be pouring profits into Canadian portfolios.
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