CNBC Stock Blog

Hamburger Stocks Worth a Nibble

Debra Borchardt|Analyst

The explosive growth in up-and-coming chains like Five Guys, Smashburger, and Elevation Burger have the old-school fast-food guys looking scared. McDonald’s saw this coming and has made adjustments to fit the fast-casual model. Sprucing up the restaurants and trying to improve the quality of the food has helped. But it’s not possible to be all things to everyone and this is where fast food will lose customers.

Wendy’s admits it is behind the curve. CEO Emil Brolick said on CNBC recently: “We’re reimaging our restaurants.”

So far, this has been done in only 10 locations where the company is “testing products that fit in that strategy,” he said.

The turnaround is going to take some time, though, and as Wendy’s slowly tweeks its approach, Five Guys and others will no doubt be happily stealing customers.

Fast-casual dining stocks like Chipotle Mexican Grill and Panera Bread are on a tear. Over the past year Chipotle shares have jumped 38 percent, while Panera has gained 28 percent. Buffalo Wild Wings is another hot name, rising more than 50 percent.

Investors will probably see less performance out of these stocks going forward as profits are taken and growth slows. Fear not, however, there are still some overlooked hamburger stocks poised to sizzle that could deliver some super-sized returns.

One is Red Robin Gourmet Burgers, which was recently upgraded by TheStreet Ratings to a buy. The chain is creating a new concept called Burger Works to better compete with the likes of Five Guys and SmashBurger. It looks like the build-out costs for these restaurants is lower than the standard Red Robin and more stores are planned for 2012.

Word on the Street

Successful Burger Works numbers could really drive Red Robin’s valuation. Red Robin stock’s is up nearly 60 percent in the past year, but based on Friday’s close at $33.42, it’s still below a 52-week high of $39.32, and is trading at a forward price-to-earnings multiple of 18.9X.

Red Robin is due to report its fiscal fourth-quarter results this coming Thursday, and Wall Street is mildly bullish ahead of the numbers with six of the 10 analysts covering the stock at “strong buy” (four) or “buy” (two), and the median 12-month price target is at $37, implying potential upside of 10.7 percent from current levels.

Meantime, Frisch’s Restaurants are known better as the home for Big Boys. The company also runs the Golden Corral chain, but has recently closed six of them and hired a banker to investigate its strategic options for the business as Big Boys sales have been going up, while Golden Corral has come down.

Although Big Boy profits have declined, two new Big Boy restaurants opened recently. The iconic Big Boy was also featured in a Chevy ad during the Super Bowl. Frisch’s is not heavily covered by analysts, but the two that cover the company both have “buy” ratings.

TheStreet Ratings also recently upgraded the stock to “buy” from “hold” because of its attractive valuation levels, largely solid financial position and reasonable debt levels. The stock is flat for the past year, and trades at a forward price-to-earnings multiple of 10.7X.

There’s also BJ’s Restaurants to consider. The company is a little bigger than fast-casual and called casual-plus. Revenues were up 18 percent in the last third quarter, net income was up 34 percent and same-restaurant sales were up 7.1 percent.

BJ’s opened nine new restaurants in the past year. Its price points are similar to Buffalo Wild Wings and Chili’s, between $12 to $13 for entrees. The menu is more than burgers, but burgers account for 12 percent of sales. The company is also known for its brew house concept, which adds to sales by taking advantage of the craft beer craze.

It is a contemporary and fresh concept without a chain image. BJ’s believes it can nearly double locations in the 13 states, and currently has plans to open 15 restaurants. The stock is up 43 percent for the past year, but still trades well below its 52-week high of $56.64 set back in July. BJ’s is due to report its fiscal fourth-quarter results on Feb. 16.

Additional News: Taco Bell Battles for Breakfast Business

Additional Views: Hot Stock Pockets: Casual Dining Stocks


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