Investors clean up as Americans dine out
On Friday nights, the crowded waiting area at the Olive Garden restaurant on Route 22 in Springfield, N.J., can quickly test one's patience. And getting a table at the nearby Red Lobster isn't any easier.
The long waits may be bad for customers, but restaurant managers view the lines as good news for the chains.
Bon Appetit! The restaurant business is booming. Americans may have just endured a recession, but you wouldn't know that at most US food outlets.
According to Mark Kalinowski, restaurant analyst for Salomon Smith Barney & Co., the average wait on a Friday night at casual dining chains clocked in at about 27 minutes in February, the third-longest wait since the summer of 2001, when the investment house began collecting data on wait times. Customers come rain, shine, recession, or war on terrorism continue to dine out in solid numbers.
"We see very good things ahead for the restaurant sector," says Eric Bjorgen, who tracks the industry for the Leuthold Group, a money management/research firm in Minneapolis. Through mid-March, the restaurant-stock sector is up some 12 percent, based on returns from 25 major companies, says Mr. Bjorgen. (See chart top, right.) By contrast, the Standard & Poor's 500 index is flat for the year.
"There has been a permanent social shift in the United States," says Bjorgen. "It used to be thought that restaurants and fast-food chains were consumer-cyclical companies," he says, with stocks rising and falling with the economy.
But now, he says, restaurants are becoming consumer staples, posting gains irrespective of economic conditions.
Of course, restaurants still have their down months. For example, shares in McDonald's, the nation's largest fast-food restaurant, have sagged in large part from currency woes and lower sales abroad. That has led Morgan Stanley analyst Michael Sherrick to slap a "neutral" rating on the company. "McDonald's seems about fairly priced," he says, with little room for major gains anytime soon.
Still, Mr. Sherrick is upbeat about many fast food chains, including Tricon (soon to be called Yum! Brands Inc., which is the home of Pizza Hut, KFC, and Taco Bell), Wendy's, and Starbucks.
Other stock analysts, representing such financial houses as Credit Suisse First Boston Corp., and Fahnestock & Co., have been gushing over Darden Restaurants, which owns Olive Garden and Red Lobster.
Experts list several reasons for the restaurant industry's steady prospects:
The baby boom generation, more than 50 million strong, is clearly restaurant-oriented, says Bjorgen. The recession has not changed that. Moreover, the more than 40 million children of boomers are also steady customers, he says.
The economics of the industry are in line to produce profits for restaurants, Bjorgen says. "Commodity prices are low and staying low. That holds food costs down," he says. Rental prices have come down in some areas, which holds down site costs. Finally, the recent recession added thousands to the US unemployment pool, which means less price competition in attracting food servers.
Chains continue to add new outlets, merge, and offer new products while sprucing up their existing sites. Arby's, a unit of Triarc, scored gains over the past year through the introduction of "market fresh" premium sandwiches. Burger King just introduced a vegetable burger. Tricon just purchased Long John Silver's and A&W All-American Food restaurants.
Still, not all restaurant analysts are sanguine about the long-term prospects of the industry. Michael D. Smith, analyst with Fahnestock & Co., sees the industry as segmented into two distinct spheres, one with solid growth potential, the other, old and tired. Fast-food chains, including most hamburger chains, he says, represent "yesterday's ballgame."
While some upward momentum may exist for some quick-service chains, the real growth, Mr. Smith says, is in the casual dining sector, such as the Darden restaurants, Applebee's, and California Pizza Kitchen.