Restaurant stocks have failed to find favor with investors in the last few quarters despite economic growth, somewhat lower energy prices and higher incomes. This is because, along with wage growth, inflation has also been on the rise, thereby translating into lower real income and thus less disposable income.
As a result, most of the restaurateurs have been grappling with sluggish comps and soft traffic growth. Resultantly, there has been a lot of buzz about the restaurant industry falling into recession.
However, if the recent economic data is anything to go by, then speculation surrounding a restaurant recession should hold no ground.
Notably, as per recent data released by the U.S. Labor Department in Washington on Jun 14, the “core” inflation rate, a closely monitored measure of underlying inflation that excludes discretionary food and energy components, weakened to 1.7% in May from 2.3% in January.
Moreover, with inflation on a 12-month basis expected to remain below 2% in the near term, restaurant companies should certainly get a boost. This is because softening inflation is likely to translate into more purchasing power and higher spending capacity.
Besides, recent strong gains in the labor market on the back of a steady rise in wages are also expected to encourage consumers to dine out more and put a check on declining traffic.
In fact, the labor market is near full employment with a drop in the unemployment rate at a nearly 16-year low of 4.3% in May. Moreover, as per data released by the Labor Department on Thursday, new jobless claims for last week fell by 8000 to 237,000 from the previous week.
Meanwhile, the Fed’s decision to lift the benchmark interest rate to a range of 1–1.25% should be further reassurance that all’s well with the economy.
Given the latest sign of the inflation pressure cooling along with other favorable economic indicators, picking some sound restaurant companies to whet your investment appetite won’t be a bad proposition.
5 Stocks to Bet Your Money On
The restaurant industry is positioned to get its mojo back. With the help of the Zacks Stock Screener, we have zeroed-in on five stocks in the Zacks categorized Retail-Restaurants industry with solid growth prospects and a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) is a full-service casual dining restaurant chain that serves an assorted range of burgers. It also offers salads, sandwiches and other entrées. The stock has returned nearly 23.2% in the past year. We are encouraged with this Zacks Rank #1 company’s efforts to strengthen the brand via menu innovation, remodeling programs and continued focus on off-premise, online ordering business.
The Zacks Consensus Estimate for current year earnings has scaled 4.4%, over the last 60 days, adding to the optimism over the stock. Moreover, for 2017, sales and EPS are projected to grow 5.9% and 2.8%, respectively.
Based in Texas, Dave & Buster's Entertainment, Inc. (PLAY - Free Report) began trading in Oct 2014. The core concept of the restaurateur is “Eat Drink Play and Watch,” under one roof. Notably, in the past year, the stock has surged 43.9%. This Zacks Rank #2 company’s unique business model with increased dependence on gaming sets it apart and we expect its entertainment business to carry the growth story forward.
Moreover, the company has been seeing an upward trend in earnings estimate revision. The Zacks Consensus Estimate for current year earnings has increased over 7%, over the last 60 days. Further, for fiscal 2017, sales growth is pegged at 16.6% while EPS is expected to grow a solid 23.2%.
Fogo de Chao, Inc. (FOGO - Free Report) owns and operates full-service Brazilian steakhouses under the Fogo de Chão brand name in the United States and Brazil. It is to be noted that the stock has gained 13.6% over the last year. Going forward, this Zacks Rank #2 company’s continued expansion plans along with various strategic initiatives such as menu innovation, remodeling of outlets, driving awareness through marketing campaigns, cost containment efforts, etc., are expected to drive growth.
Also, upward estimate revisions reinstate hope in the stock’s prospects. The Zacks Consensus Estimate for current year earnings has climbed 2.2% over the last 60 days. Moreover, for 2017, sales and EPS are projected to grow a respective 10.5% and 6.4%.
Headquartered in Winter Park, FL, Ruth's Hospitality Group, Inc. (RUTH - Free Report) together with its subsidiaries, develops, operates and franchises fine dining restaurants. Its restaurants offer food and beverage products to special occasion diners and frequent customers, as well as business clientele. This Zacks Rank #2 company operates restaurants under the Ruth’s Chris Steak House trade name and is one of the largest upscale steak house companies in the U.S. Notably, over the past year, the company’s shares have witnessed a gain of 29.6%.
Moreover, the nearly 1% rise in the current year’s earnings estimate revisions add to the optimism. Further, for full-year 2017, sales growth is poised at 7.7% while EPS is expected to grow 10.8%.
Based in Orlando, FL, Darden Restaurants Inc. (DRI - Free Report) is one of the largest casual dining restaurant operators worldwide. The company has operations in the United States and Canada with more than 1,500 restaurants. Notably, the stock has rallied 33.1% in the past one year.
We are positive on this Zacks Rank #2 company’s acquisition of Cheddar's along with various sales boosting initiatives like increased focus on operational excellence, menu innovation and technology-driven moves. Darden’s efforts to check costs are also commendable. What’s more, for fiscal 2017, sales growth is pegged at over 5% while EPS is likely to improve a solid 13%.
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