Restaurant stocks rise on lower gas prices
While the net impact of lower fuel prices is a hot topic for debate, one industry is already seeing a boost: restaurants.
As people spend less money on gasoline, they're spending more money on other discretionary items, including going out to eat and drinking at bars, according to recent economic data. Such spending rose 0.8 percent in December over November, according to the Commerce Department. The increase came despite a 0.9 percent overall decline for retail sales during that period.
As a result, some investing pros are taking a closer look at shares of publicly traded restaurant companies—even as many others remain focused on huge declines in energy company valuations. The investment thesis is simple: Restaurants will garner more sales and grow their businesses in a declining fuel-price environment.
A handful of well-known brand-name stocks posted solid gains to start 2015. And the best-performing restaurant stock in the so far is not even a traditional restaurant at all.
Coffee giant Starbucks gained nearly 7 percent year to date. Much of the move comes on the heels of a quarterly earnings report that matched Wall Street expectations. But Starbucks added that its holiday sales were helped by expanded product offerings, and that its customer loyalty program was gaining more traction.
In addition, sales in the China/Asia-Pacific region grew 86 percent over the same period last year.
Analysts are bullish, with 85 percent of those polled by FactSet having a "buy" or equivalent rating on the shares. Those analysts also have an average target price of $95.38 per share, which is 8 percent above the current price.
"We believe Starbucks remains an elite global consumer brand with highly attractive core business fundamentals," sais Piper Jaffray senior analyst Nicole Miller Regan, who added that it remains one of the firm's top investment recommendations.
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The second-best performing restaurant stock in the S&P this year is Darden Restaurants, the parent company of The Olive Garden, LongHorn Steakhouse and The Capital Grille. Shares are up more than 4 percent year to date and up 20 percent over the last 12 months. The analyst community is mixed on future prospects for Darden, as 61 percent of those polled maintain a "hold" or "neutral" rating on the stock. The current $57.29 average target price implies a 6 percent drop from current levels.
The third-best performing restaurant stock is the fast-casual Mexican food juggernaut Chipotle Mexican Grill. Shares are also up more than 4 percent so far this year, and have surged 42 percent in the last 12 months.
That strong upside move has not put valuation concerns front and center. Chipotle trades at 56 times earnings, and shares are just 2 percent away from meeting the average analyst target price.
One of its competitors in the space is Qdoba Mexican Grill, which is owned by publicly traded Jack-In-The-Box. While not part of the S&P 500, Jack-In-The-Box stock has risen by 5 percent year to date and has gained 64 percent over the last 12 months. Shares are now in line with analyst target prices, with a 50-50 split between those who rate it a "buy" and those who rate it a "hold."
The notable laggard in this group is McDonald's, the most heavily weighted restaurant stock in the entire S&P 500. The company has struggled to grow sales and win back customers from smaller competitors like Chipotle and Burger King.
David Palmer, an analyst with RBC Capital Markets, expects that lower-priced menu offerings from competitors could continue to put pressure on the company. McDonald's is also trying to find the right product mix for its menu.
Earlier Friday, the company reported quarterly profits and sales that missed analyst expectations. However, sales at stores open at least a year on a global basis fell by a smaller-than-expected 0.1 percent. That led to some earlier strength in the shares, however those gains have since faded.
The stock has started off 2015 with a 4 percent drop and has lost 6 percent over the last year. Nearly 4 out of every 5 analysts who cover the stock have a "neutral" rating on it, although the current average target price implies a possible 7 percent upside move.
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Even as fuel prices continue to fall, the health of the overall economy has much of America still feeling skittish. While many are willing to spend a little more money on dining out more often, the financial results from companies like McDonald's, Starbucks and others shows that people are still being picky about where they choose to spend their hard-earned income.
With the U.S. Energy Information Administration now predicting that the average American household could spend $750 less on gasoline this year, investors will be watching where those extra savings are deployed, and whether restaurants could continue to be a beneficiary.