Darden Restaurants owns Oliver Garden.
Luke Sharrett/BloombergHopes are high that 2021 will be a better year than the last. That is especially true among restaurant investors, many of whom are eagerly looking forward to the reopening of the economy.
The Covid-19 pandemic caused turmoil throughout the restaurant industry in 2020. Bans on indoor dining, limits on seating, and worries about becoming infected were among the numerous factors that led people to eat out far less often. Trouble getting supplies such as meat was another problem, especially early in the pandemic.
Yet not all restaurants suffered. Many of those with robust infrastructure for deliveries and online orders, ample drive-through locations in the suburbs, and a focus on health were able to thrive. Others that were hammered have seen their stocks bounce back a good deal, in anticipation of better days.
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With that in mind, Barron’s looked for restaurants that appear poised to deliver earnings growth this year but that haven’t been bid up to unreasonable levels already. We used FactSet to search for companies with market values above $1 billion, whose stocks were trading for less than 30 times forward per-share earnings, and eliminated any that analysts don’t think will be able to deliver growth in EPS this year.
Some stocks, like Starbucks (ticker: SBUX) and Papa John’s International (PZZA) are expected to boost profits, but had valuations that knocked them off the list. Other 2020 darlings, such as Chipotle Mexican Grill (CMG) and Texas Roadhouse (TXRH), could see declines in their year-over-year EPS growth. That left us with four names.
Jack in the Box (JACK) is the cheapest on the list, with a forward valuation of 17 times, while analysts expect EPS to climb 20.1% year over year. The stock climbed nearly 21% in the past 12 months, partly because sales rebounded fairly early in the year. Barron’s flagged it in our August screen of restaurants that looked able to withstand the pressure of the pandemic. Analysts like Jack in the Box too.
Brinker International (EAT) is the second cheapest, trading at less than 18 times forecasted earnings for the next 12 months, even though it has risen 37.5% in the past year. The consensus view among Wall Street analysts is that EPS will pop more than 53% year over year.
The operator of Chili’s and Maggiano’s has gotten plenty of attention from analysts, some of whom think profits could double post-Covid. However, like other casual dining firms, the company has struggled as the pandemic has worsened, forcing states and cities to ban indoor dining even as temperatures drop. It withdrew its financial forecasts in December.
Cracker Barrel Old Country Store (CBRL) is next, trading at just under 23 times, though the chain is expected to see the biggest increase in EPS. Analysts foresee a leap of 116.3%, though some skepticism remains about the outlook. The stock is off more than 10% in the past year as a result of restaurant closures and the fact that more people are working at home, giving them less reason to dine out for breakfast. Management cut the dividend last spring, and an activist investor sought representation on the board in September.
Darden Restaurants (DRI), changing hands at 24 times forward earnings, is the last to make the list. Though the valuation is higher, analysts’ expectation for EPS growth is the lowest in the group, at 3.6%.
The company—the owner of the Olive Garden and Texas Steakhouse chains—warned investors last month that rising Covid cases were weighing on its business. Others have worried that after a share-price gain of 9% in the past year, a recovery is already baked in.
Still, management reinstated the dividend this fall. Some analysts believe the business will rebound quickly because the company became more efficient during the crisis, and because competition is diminishing as smaller players permanently disappear.
Write to Teresa Rivas at teresa.rivas@barrons.com
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Four High-Growth Restaurant Stocks That Are Still Trading Cheaply - Barron's
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