Eric Dutram

Bull of the Day: Red Robin Gourmet Burgers (RRGB)

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March 04, 2013 |

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Many investors were worried that the Fiscal Cliff deal would be devastating to consumer discretionary firms. The prospect of higher taxes was expected to cut into many paychecks, and curtail spending levels in the process.

This has not been the case through the first two months of the year though, as many consumer discretionary firms, and particularly several in the restaurant space, have seen great starts to 2013. This has especially been the case for the small but surging Red Robin Gourmet Burgers (RRGB - Analyst Report).

If you haven’t heard of Red Robin, don’t be worried. The firm isn’t exactly McDonald’s (MCD - Analyst Report), or even Wendy’s (WEN - Analyst Report), in terms of its scope, as the Colorado-based company has less than 500 total restaurants. Still, the number of Red Robin locations is quickly surging as many consumers are embracing their lineup of burgers and various other lunch and dinner items.

Not only have customers found the burgers delicious, but investors certainly have as well. The company has seen its share price nearly double (up 80%) in the past two years, nearly quadrupling the broad market’s performance in the same time frame.

Yet even with this impressive performance, RRGB likely still has plenty of room to run. The company has a market cap just a tad over $600 million, so it is clearly has a long way to go before it reaches its growth limit.

Estimate Picture

Analysts generally tend to agree with this sentiment, at least when looking at recent estimate revisions. Of the nine estimates for the June quarter, eight have been increased in the past 30 days, while nine of 11 estimates have gone up for the full year in the same time period.

While it is true that the current quarter is a bit choppier, there is universal agreement among analysts for the longer term picture. This suggests that investors can still get in on this stock for the longer term, even if there is some volatility in RRGB over the next few weeks.

Still, even with the clouded short term earnings picture, investors should note that RRGB has a stellar record when it comes to earnings surprises. Over the past four quarters, the company has averaged a 23.9% surprise, so it definitely has a history of beating to the upside.

Thanks to this history of positive surprises and the agreement among analysts, Red Robin Gourmet Burgers currently has a Zacks Rank of 1 or ‘Strong Buy’, suggesting outperformance in the short to medium term. This is further confirmed by the relatively positive ranking of the restaurant industry from a Zacks Industry Rank perspective, meaning that RRGB is in pretty good company.

Bottom Line

It is true that RRGB has been a solid performer, but we expect this to continue over the medium term. The company has clearly found a winning combination with its restaurants, and expansion possibilities are pretty much endless at this point in time.

Analysts seem to agree on the prospects of Red Robin too, as the company is viewed very favorably by those following the stock. So consider taking a closer look at this small cap company if you want a high growth—but volatile—play that is poised to continue its run as we push further into 2013.

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