Following the economic sluggishness this past winter, the economy is now gaining momentum. This has been reflected in a series of reports, one of which has revealed that the manufacturing sector had expanded in April at the quickest pace since end last year. Monday’s data on the services sector also reflected an upbeat trend, indicating that growth was occurring across sectors.
Services Sector Expands
The ISM non-manufacturing index increased to 55.2 in April from 53.1 in March. This is the highest level for the index since the month of August. The new orders index increased 4.8 points to 58.2%. 14 of the 18 industries covered by the report expanded last month.
These industries include construction, retailers and restaurants. Data from the report indicates that the economy is on the verge of recovering from a weak first quarter. Lack of growth during that period has been attributed to a long and arduous winter season.
Meanwhile, the employment rate has declined to 6.3% according government data released on Friday, beating most expectations. 288,000 jobs have been added in April, creating further optimism about the economy.
Restaurant Performance Index Surges
Coming to the restaurant sector in particular, recently released data suggests that restaurant performance has increased significantly. As per data from the National Restaurant Association, its Restaurant Performance Index increased to its highest level in 10 months during the month of March.
The index increased from 100.5 in February to 101.4 in March. This is the 13th consecutive month that the index has remained above 100, which signals growth in all key industry indicators. More significantly, 55% of restaurant operators have experienced a higher level of same store sales from March 2013 to March 2014.
46% of restaurant operators experienced higher customer traffic during the same period. Additionally, operators are more optimistic about an increase in sales in the future. 49% believe that sales will increase in a six-month period compared to 40% in the month of February. This is the highest level witnessed over the last two years.
An expansion in the service sector as a whole and a growth in industry specific indicators imply that the restaurant sector makes for a good investment choice. Below we present two restaurant stocks which possess the potential to grow appreciably, each of which also has a good Zacks rank.
Ruth's Hospitality Group Inc.
Ruth's Hospitality Group Inc. (RUTH - Free Report) is a company with global operations which focuses on upscale dining. The company owns the following concepts: Mitchell’s Fish Market, Ruth’s Chris Steak House, Mitchell’s Steakhouse, Columbus Fish Market and Cameron’s Steakhouse.
The company has its headquarters in Winter Park, Florida and was founded in 1965. Ruth’s Hospitality Group, Inc had 150 franchised and company owned restaurants as of February 21, 2014.
The company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 7.90%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 16.91.
Denny's Corporation (DENN - Free Report) owns and operates the Denny’s restaurant brand via its subsidiary company Denny’s, Inc. The company has its headquarters in Spartanburg, South Carolina and was founded in 1980.
The company had around 1,700 company owned, licensed and franchised restaurants as of February 5, 2014. Denny's Corporation has 100 restaurants across the world. These include outlets in Honduras, Guam, Curaçao, Puerto Rico, Canada, Costa Rica, Mexico, the Dominican Republic, Chile, El Salvador, and New Zealand.
Currently the company holds a Zacks Rank #2 (Buy), and has expected earnings growth of 14.80% It has a P/E (F1) of 18.51.
As the economy continues to pick up speed and employment opportunities grow, spending at restaurants is also set to increase. This is why these two choices would make excellent additions to your portfolios.