From Bear Stearns:
*** We are expressing near term caution on the Restaurant group, especially for the casual dining stocks that performed
well in 2000 with strength in the fourth quarter.
***
We anticipate profit taking in early 2001 as same store sales moderate in a slowing economy. The industry's
fundamentals remain solid and portend another year of positive same store sales growth for well-managed concepts,
but even for those companies, we expect the rate of increase to slow reflecting economic conditions. Sales reports
for December to be released this week and next may unnerve investors given widespread winter weather conditions
that undoubtedly impacted results.
***
Our stock specific focus is on Brinker, which we are downgrading from Buy to Attractive, and Sonic, which will
report 1Q earnings after the close today, and for which we are lowering our 2Q estimate. Brinker hit a new high last
Friday and is close to our price target with tough March quarter comparisons forthcoming. Oklahoma-based drive-in
operator Sonic is most exposed to the ice storms that swept the Southern Plains last week; we are lowering our
2Q (Feb.) estimate.
***
Widespread insider selling in the industry may further exacerbate investor concerns.
***
Our full year 2001 outlook for the Restaurant group remains bullish given what we expect to be strong relative
earnings performance. But we prefer to buy the stocks on weakness.
Our other Buy-rated casual dining stocks are Applebee's, Darden and Ruby Tuesday. We are concerned about potential corrections for
these stocks as well, but each sells at a significant discount to Brinker mitigating potential downside. Brinker sells at 18.9x our
calendar 2001 EPS estimate, while Applebee's is at 11.4x, Darden at 13.5x, and Ruby Tuesday at 15.7x. Long term projected growth
rates for each company is in the high teen percentage to 20% rate. After tough fourth quarter 2000 and first quarter 2001 comparisons,
Applebee's has easy sales comparisons and a new core menu designed to improve consumer perception of its food. In addition, the
company has a fast food like franchising business model that makes it more defensive with an earnings stream less sensitive to same
store sales. Darden has suffered a fairly sharp correction already (15% off its high) despite recently posting an upside surprise for its
second quarter ending November. Darden has recorded exceptional same store sales growth for both Olive Garden and Red Lobster,
rates that we expect to slow. But Darden has remodel programs at each concept that should lead to nicely positive sales comparisons.
Ruby Tuesday, which will report its November quarter next Monday, January 8 th , has the potential to be the fastest grower of the
established casual dining operators given its smaller base and new business model that includes franchising. |
