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Burger Stocks: Sales Take a Hit, Bubble About to Pop?

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Burgers have been quite a rage in America over the past several years. From being a region-focused market to taking over global markets by a storm, the burger industry has come a long way. With the gourmet burger chains offering a diverse platter, the market has been spreading out with new entrants and expansion by established ones.

As per data from research firm Euromonitor International, burger sales in the U.S. grew over 14% between 2010 and 2015.

The firm also noted that competition among burger companies has intensified over the years, peaking in 2015, with promotions and exclusive menu offers flowing in from all corners. In fact, U.S. burger sales touched $103 billion in 2015, marking a remarkable year for burger stocks.

The spell of good tidings began with the IPO of Shake Shack, Inc. (SHAK - Free Report) in Jan 2015, the stock price of which scaled higher in the months that followed. Though Shake Shack came crashing back to earth in the later part of 2015, this made the stock less expensive by significantly bringing down its Forward Price to Earnings ratio from the previous levels of nearly 1000 times earnings.

Meanwhile, keeping aside its issues, burger giant McDonald’s Corp. (MCD - Free Report) has managed to somewhat turn itself around in the domestic market, mainly driven by the success of its all-day Breakfast platform. Further, global comps at McDonald’s have been rising over the past couple of quarters.

The momentum in 2015 was maintained well into 2016 with major burger stocks like McDonald’s, Shake Shack and The Wendy's Company (WEN - Free Report) posting better-than-expected results for the first quarter of 2016.

However, the forecast for second-quarter 2016 and full-year 2016 raises questions about the continued momentum. Also, the craze for burgers is fading which is likely to have an impact on the stocks in the days ahead.

Bubble About to Burst?

As per a recent report by Nomura Securities, after years of soaring demand, burger sales in the industry is now taking a hit.

As per the firm’s analysts, comps growth in the U.S. burger segment has slowed down significantly from the first quarter and the segment is no longer a bright spot for the industry.

In fact, the firm expects comps to be relatively flat in the second quarter of 2016 and with limited scope, the segment is likely to remain slothful in the rest of 2016.

Meanwhile, the outperformance by the stocks in the first quarter could partly be attributed to the conservative estimates that aided the earnings and revenue beat. Also, the 2016 outlook for certain burger stocks is far from rosy

Though Red Robin Gourmet Burgers, Inc.’s (RRGB - Free Report) earnings beat the Zacks Consensus Estimate, weak sales and lowered guidance were a major drag. The company  lowered its revenue growth guidance for 2016  to 8% from the previous 8.5% to 9.5% range.

Meanwhile, management at McDonald’s expects adverse currency translation to hurt EPS by $0.05 to $0.07 in 2016. Analysts at Nomura also downgraded McDonald's to Neutral from Buy because of slow comps growth expectations.

Further, Wendy’s expects second-quarter comps growth to fall slightly short of the full-year target of roughly 3%, possibly due to tougher-than-normal spring weather conditions in the northeast part of the U.S. where the company has a high concentration of restaurants.

Our Take

Burgers have been the comfort food for Americans for long. However, the dreary outlook for 2016, declining demand and low expectations for the burger industry provide no comfort to investors for now.

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