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Sector Watch: Casual-Dining Stocks Are Back on the Menu

Christina Cheddar Berk

Casual-dining stocks have been out of favor much of this year. But a rash of acquisitions by private-equity groups in recent months has investors taking another look at the sector.

Some of the older casual-dining chains have gotten a nice bump on takeover speculation, though the newer ones are still largely out of favor.

Still, some investment pros think you might be better off focusing on overlooked newer chains with solid growth potential.

"I think you could make some money in the growth stocks," said Michael Smith, an analyst at Oppenheimer. "It seems they are the ones neglected in terms of price valuations."

Smith cited Cheesecake Factory, BJ's Restaurants and Panera Bread as examples. Smith owns shares of BJ's Restaurants, the operator of BJ's Roadhouse.

Money in Buyouts

Investors have still made money in older chains that have attracted buyouts. Even in the midst of a slowdown in casual dining, private-equity firms see older restaurants as strong cash generators with valuable real-estate assets.

Casual Dining Picks

Research firm Dealogic has tracked 15 restaurant buyouts by private-equity groups this year. That record level of acquisitions has been valued at some $7.1 billion, compared with last year’s total of $4.4 billion on 16 deals.

Included in that total is CBRL Group’s sale of Logan’s Roadhouse steakhouse to Bruckman, Rosser Sherrill of New York, and Canyon Capital Advisors of Los Angeles, as well as the recent sale of OSI Restaurant Partners, the operator of Outback Steakhouse, to Bain Capital and Catterton Partners. The OSI sale, which was valued at $3.2 billion, was the largest of those deals to date.

Better Values

Up-and-coming restaurant chains are less likely to grab the attention of private-equity firms because they're still investing cash to expand. However, some analysts think that neglect has made them better values.

The top picks of Nicole Miller Regan, an analyst at Piper Jaffray, include California Pizza Kitchen, which has continued to post same-store sales increases despite the recent downturn in casual dining. In addition, she still sees plenty of opportunities for the Los Angeles restaurant chain to expand to new markets. 

Chipotle Mexican Grill is a stock she likes for its focus on high-quality ingredients. In some markets, Chipotle uses only all-natural and organic foods, which is in touch with consumer trends, Miller Regan said. She doesn't own either stock and her firm has no investment-banking relationship with the companies.

Baird analyst David Tarantino also favors Chipotle, which he rates an “outperform.” He expects Chipotle same-store sales to accelerate, which will help improve investor sentiment. His other top picks include Texas Roadhouse.  Tarantino doesn't own either stock and his firm doesn't do banking business with the companies.