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Restaurant Stock Pick for 2014

There were some earnings surprises, good and bad, in the restaurant realm this season, but we will not focus on the numbers right away.  The New Year is about 10 weeks old now so the trendy thing to do is make stock selections for the year. To do this, we will focus on the one equity that was basically on everyone’s radar, Chipotle Mexican Grille (CMG). By now, any restaurant follower knows that this casual chain grew out from under the McDonalds Corp. (MCD - Free McDonalds Stock Report) shadow in 2006 and its price chart has been a thing of beauty ever since. After going public at $61.50 a share, it now trades for near $600. Moreover, the future is still bright for this taco and burrito maker. The company closed out 2013 on a solid note, is expected to post earnings growth of about 20% this year, and add close to 200 stores in 2015. In sum, the future appears bright. We are also high on the newer concepts that management is rolling out, namely the ShopHouse Southeast Asian Kitchens and fast-casual pizza concepts. So this looks like the winner right? This is the big pick for 2014? Well, not so fast.

Yes, Chipotle is on fire lately and deservedly so, but how are we doing our subscribers any service if we recommend stocks with price-to-earnings multiples approaching 50 and quotations that are already on the cusp of our 3- to 5-year Target Price Range. With that in mind, we are not especially recommending Chipotle as an investment, just now.

Our selection for 2014 is the only stock in our restaurant industry that currently carries a Timeliness ranking of 1 (Highest), Wendy’s Company (WEN). This quick-service chain has taken its lumps over the last few years and now appears poised for a comeback. The company operates in the huge shadow of Mickey D’s, but its presence is growing and a restructuring completed during a buyout phase has done wonders for the operational structure. Underperforming locations are being pared rapidly and a bevy of new locations will replace these ones over time. In the meantime, a more-with-less strategy will be on full display. Too, a separation from long-time partner chain Arby’s was necessary for the “big brother” to start focusing on its own business. Add to this that WEN pays a dividend in line with the Value Line average and we like these shares from a number of reasons notably, for the year ahead and the long term.

Blame It On The Weather

We are not fans of the new trend in this sector to blame results that slightly missed the mark on “the weather”. We are based in New York City. We are well aware how severe the cold has been this winter. Companies such as Brinker International (EAT) were quick to put the blame at Mother Nature’s doorstep when investors were not enamored with their most recent release. Even McDonald’s touched on the low temperatures on its conference call. Yes, results are obviously effected somewhat, but what about the “cabin fever’’ aspect, whereas people like to immediately get out of the house and return to usual operations after a big storm. Usually, the impact of say, snow, is followed by a brief spike in sales. So we aren’t buying this in earnest. Anyone waiting on line at McDonalds when someone orders ANYTHING from the McCafe can tell you that the amount of time waiting is much more of a turnoff then a few inches of snow, but we digress.

Anyway, this weather theory was particularly spoiled by the strong showing of Red Robin Gourmet Burgers (RRGB). This chain saw same-store sales climb 3.2% in the most recently disclosed quarter and that was with one less week in the comparable period. New menu items and improved marketed were given the kudos for this rise. Notably, the company continued to buy back shares to return value to shareholders.  A sum of $2.5 million was repurchased in this particular quarter. Coincidentally, the only mention of weather on this conference call was the slight uptick in operating costs brought about by raising the thermostats at several of its locations.

What About Bob?

Family-style chain Bob Evans Farms (BOBE) has struggled thus far in fiscal 2013 (years end the last Friday of April) and recently announced that the January interim was more of the same. Share net came in at $0.30 well below the $0.53 we were looking for and the $0.57 average on the Street. Revenues declined more than 20%. All parties had expected a falloff, but one notably less severe. Same-store sales dipped 1.8% in the quarter.

BOBE’s top brass blamed the severe weather for the setback, but operations were in a slump long before the season’s first snowfall so we are skeptical of this claim. To the company’s credit, same-store sales in its Florida locations did climb more than 4%. Still, Florida has some extreme weather of its own. However, it has the demographics to support ample growth. Therefore, we think it is more a case of some Baby Boomers loosening the purse strings than a temperature-related concern.

Potential Shakeup at BJ’s Restaurants

Casual dining establishment BJ’s Restaurants (BJRI) hasn’t been performing well for quite some time now and it seems that some entities with stakes in the company are looking to change the decision- making panel. The stock was up more than 30% intraday on March 6th when investors applauded news that a few funds with positions in BJRI will be nominating new directors for the board. Two separate concerns will be nominating individuals to take over as many as five seats; a conglomerate of PW Partners Atlas Fund II and Luxor Capital Partners head one group and Clinton Relational Opportunity Master Fund is the other. We will be monitoring this situation to see if any changes are enacted. The initial reaction, as stated, was overwhelmingly positive.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.