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Should Restaurant Stocks Love Trump's Labor Secretary Pick?

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President-elect Donald J. Trump recently nominated restaurant chain executive, Andy Puzder as the Labor Secretary. Puzder is the CEO of CKE Restaurants, the parent company of the fast-food burger chains Carl’s Jr. and Hardee’s. He is an outspoken critic of increasing minimum wages as under the Affordable Care Act.

Obamacare

The Affordable Care Act, commonly known as Obamacare, requires employers to extend health benefits. The law entails restaurants with 50 or more full-time equivalent employees to offer health-care coverage to substantially all full-time employees and their dependents. Employers are liable to pay penalties if they do not follow these rules.

Moreover, there are worker unions protesting since a long time to raise the minimum wage rate to $15 per hour, up from the current level of $7.25, to which the Obama administration seems somewhat empathetic. Additionally, the Obama administration also sought to raise the salary cap for workers eligible for overtime pay (time-and-a-half the usual pay) to $47,500 a year which would be about double the current threshold.

Trump’s Choice

Andy Puzder has spoken out against all these regulations for a long time. He is of the view that if the federal minimum wages are increased beyond a viable level of $9 per hour, restaurants will likely replace workers with machines, and he himself is a supporter of the idea too. Moreover, he has consistently opposed long-standing rules that guard workers and law-abiding employers, and established that he regards corporate welfare and profits over workers' well being. In fact, he recently co-authored the book, "Job Creation: How It Really Works and Why Government Doesn’t Understand It."

Restaurant Industry

The restaurant industry is struggling through its worst year since the end of recession. Consumer discretionary spending in the dining-out space has been really low in the past few quarters, pulling down companies’ sales.

Moreover, we note that the third quarter of 2016 marked the third consecutive quarter of negative comp sales for the restaurant industry as a whole. In fact, traffic at U.S. fast-food restaurants fell 1% in the third quarter to mark the sector’s first traffic decline in five years; thereby hurting sales.

Wage inflation added to these woes. Employers had to incur higher costs which hurt their margins amid an already weak top-line performance.

However, the appointment of Andy Puzder could bring some relief in this regard. He is expected to not follow the footsteps of the Obama administration and provide some respite to restaurateurs in the form of lower minimum wage level and more lax regulations.

Meanwhile, Trump himself has announced plans to “repeal and replace” the Affordable Care Act. He is of the view that even though the act helps purchase insurance plans at a subsidized rate, it does levy taxes on the industry that reduces profitability. Trump also plans to trim business tax rate to 15% from 35%.

All of these moves by the new government body, though not effective in boosting the top line, can prove to be tailwinds to companies’ bottom lines as margins are expected to expand favorably.

Retail - Restaurants Industry Price Index

Bottom Line

The Zacks categorized Retail Food & Restaurants industry has already grown over 6% since the announcement of election results on Nov 9, which might be an indicator of good days ahead.

Meanwhile, restaurateurs like BJ’s Restaurants, Inc. (BJRI - Free Report) , Buffalo Wild Wings, Inc. and Darden Restaurants, Inc. (DRI - Free Report) with largely domestic operations are gearing up for a turnaround in expenses incurred. It could also help upgrade these companies from a Zacks Rank #3 (Hold) or #4 (Sell).

On the other hand, companies commanding a huge work force globally, including the likes of McDonald’s Corporation (MCD - Free Report) and Domino’s Pizza, Inc. (DPZ - Free Report) , are hoping to get some relief in their domestic operations too. Both these companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Often times, a rising tide will lift all boats in an industry, as there can be broad trends taking place in a segment that are boosting securities across the board. This could happen in the restaurants space as well as a result of Puzder’s moves. The industry could be uplifted from its current position at the bottom 36% out of the over 250 Zacks categorized industries.

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