Restaurants have delivered healthy same-store sales (SSS) growth in recent quarters, with the industry reaching a 10-year peak of +4.6% comparable sales (comps) in the first quarter of 2015. Credit Suisse expects these trends to moderate into the second half due to “more difficult compares, more cautionary lead indicators of late, and lapping the gas price decline.”
One silver lining may be that easing food inflation allows restaurants to outperform on margins. However, countering this favorable trend, the firm sees more evidence of rising labor costs across the group.
Credit Suisse tweaked its price targets and forecasts for several companies in this sector.
Most notably, heightened risk of a catalyst event prompted a rise in the price target on Yum! Brands Inc. (NYSE: YUM) to $85, up from $77. However, Credit Suisse’s base case continues to be that the company will continue to prioritize a fundamental recovery in China over a business separation or leverage event.
The firm decreased its Chipotle Mexican Grill Inc. (NYSE: CMG) price target to $725 from $770, to better reflect the multiple compression that occurs as comps decelerate and the decline in overall group multiples overall.
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Credit Suisse tweaked its McDonald’s Corp. (NYSE: MCD) model for recent debt issuance (about $4.3 billion). There was no change to the 2015 estimate, but the 2016 EPS estimate moved up by $0.01 on higher buybacks in the second half of 2015.
The top long picks going into the second half from Credit Suisse are Dunkin’ Brands Group Inc. (NASDAQ: DNKN) and Darden Restaurants Inc. (NYSE: DRI). The firm’s channel checks suggest Dunkin’s positive SSS momentum has continued into the second quarter and that second half SSS forecasts for Dunkin’ in the United States could prove conservative. The checks also indicate that franchisees remain very positive on western expansion.
Darden has a number of catalysts driving the recent upgrade to Outperform. Second half upside for Darden is seen in delivering cost savings ahead of expectations and potentially an accretive real estate transaction.
Separately, the firm is more cautious on Wendy’s Co. (NASDAQ: WEN) and Buffalo Wild Wings Inc. (NASDAQ: BWLD).
Credit Suisse explained its investor positioning and sentiment for the second half of 2015:
After dozens of marketing meetings in recent weeks, our sense is that most investors view the restaurant space as expensive, but not an outright short. Investors seem generally cautious into the second half given difficult compares and the moderation in industry sales indices (Black Box, Knapp-Track have been weak of late). Rising interest rates are also a longer-term concern, though the current outlook for very modest rate hikes seems unlikely to materially impact valuations into 2H15. In terms of stock selection, McDonald’s seems to be a popular long idea given easy compares (in a group facing difficult ones), a discounted valuation (vs. peers, not history), the dividend, and potential for further strategic change/activism. Yum seems to be another widely held name, particularly among hedge funds. Longonly accounts continue to favor Starbucks Corp. (NASDAQ: SBUX) given high confidence around earnings forecasts and the continuation of at least mid-single digit SSS. Chipotle sits at the other end of the spectrum, with very high angst heading into the July earnings call amidst difficult second-quarter/third-quarter compares. We believe even a “flattish” third quarter comp update may be sufficient to meet expectations at this point. On Dunkin’, we sense an increasingly positive tone following the first quarter beat. On Wendy’s, we sense growing concern around the ability to sustain the current multiple post the tender offer. Finally, the majority of investors we speak with seem to still be lukewarm on the turnarounds at Darden and Panera Bread, suggesting room for sentiment to improve.
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Shares of Dunkin’ were up 1.2% to $54.51 midday Tuesday. The stock has a consensus analyst price target of $54.23 and a 52-week trading range of $40.50 to $54.60.
Darden shares were up 2.3% to $70.99, in a 52-week trading range of $43.56 to $73.40. The consensus price target is $69.68.
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