Once a company gets in a dominant position in the casual dining arena, it’s extremely hard to dislodge it when the concept becomes hip. The more people like and frequent the restaurants, the more they tell their friends and associates. Such was the case with Chipotle Mexican Grill Inc. (NYSE: CMG). The unique menu was considered fresh and healthy to some degree. Combined with quick service and a cool atmosphere, it was huge with consumers. Then an E. coli nightmare set in and the stock has taken a beating, and many former loyal customers may decide to seek alternatives.
A new Jefferies report highlights some outstanding restaurant stocks to buy for 2016, many of which have very unique menus and strong concepts. We found three that are not only poised for a potential solid year, but could have the kind of cuisine that could attract a former Chipotle customer. But first, a look at Chipotle itself.
Chipotle had continued to astound shareholders and short sellers alike until the recent headline issues. It has more than 1,500 restaurants worldwide and is planning on opening up to 195 new restaurants this year.
By now most investors are familiar with the E. coli outbreak that has severely affected the company. Analyst across Wall Street have acknowledged that the outbreak has had a larger impact on sales than expected, and the stock plunged late last year when the company rescinded its 2016 forecast and projecting its first quarterly same-store sales decline as a public company. It also noted that while the outbreak has expanded to several new states, no new infections have occurred since early November.
In November, Chipotle announced plans for a $300 million stock buyback and unveiled revamped food-safety procedures, which include improving its supply chain and conducting DNA testing of produce. While some feel that, with the outbreak contained, an improvement to the food safety and a strong brand with consumers, traffic could turn positive in the third quarter of 2016. Yet, investors should note Wall Street as a whole remains very negative and any future outbreaks could be very bad for the company.
The Thomson/First Call consensus analyst price target is $571.38. Chipotle shares closed Monday at $448.81
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Here are the three stocks rated Buy at Jefferies that could possibly benefit from the Chipotle’s troubles.
Fogo de Chao
This had a hot summer initial public offering last year, and the stock has been cut in half since coming public. Fogo de Chao Inc. (NASDAQ: FOGO) is a leading Brazilian steakhouse, or churrascaria, which has specialized for more than 36 years in fire-roasting high-quality meats utilizing the centuries-old Southern Brazilian cooking technique of churrasco. Fogo delivers a distinctive and authentic Brazilian dining experience through the combination of high-quality Brazilian cuisine and a differentiated service model known as espeto corrido (Portuguese for “continuous service”) delivered by gaucho chefs.
Jefferies loves the unique concept and feels the stock has been hammered to some degree by issues in Brazil. With the business growing, new restaurants being opened and the tough comparisons from the World Cup over, the stock offers tremendous value at current levels.
The $24 Jefferies price target is higher than the consensus target of $20.33. Shares closed most recently at $14.23.
Fiesta Restaurant
This stock has been hit hard since last year and looks ready to bounce. Fiesta Restaurant Group Inc. (NASDAQ: FRGI) is the parent company of the Pollo Tropical and Taco Cabana restaurant brands, which specialize in the fast-casual, ethnic restaurants that offer distinct and unique Caribbean and Mexican inspired flavors with broad appeal at a compelling value. The brands feature made-from-scratch cooking, fresh salsa bars and drive-thru service and catering.
Jefferies has met with management in the past and has come away feeling that the strong growth drivers and underlying fundamentals that have driven solid growth are still in place. New store volume at Pollo Tropical in Texas is strong, with some even exceeding Florida which is the franchise home state. Jefferies feels that the huge sell-off since last March is a buying opportunity.
Jefferies has a $57 price objective, and the consensus target is $50.50. Shares closed Monday at $33.19.
El Pollo Loco
This was a very hot IPO in the summer of 2014 and has been absolutely crushed over the past six months. El Pollo Loco Holdings Inc. (NASDAQ: LOCO) is down over 50% since last May, and for aggressive accounts this company could have big upside. El Pollo Loco, which means “the crazy chicken” in Spanish, develops, franchises, licenses and operates quick-service restaurants under the El Pollo Loco name in the United States. The company offers individual and family-sized chicken meals, Mexican-inspired entrees, sides and alternative proteins. As of June 25, 2015, it had approximately 415 company-owned and franchised restaurants in Arizona, California, Nevada, Texas and Utah.
The analysts note that the company has made some marketing errors, but they feel that is behind it, and the stock is dirt cheap at current levels. They also believe that management is taking the right steps to regain value customers and see continued strong cost management, along with 3% to 4% commodity deflation helping costs. Plus the exposure to the strong California market can drive margins and earnings growth.
The Jefferies price target is $17. The consensus estimate is $15.83. The stock closed at $12.60.
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All these concepts have the ability to lure away the Chipotle customer, because they all have menu items that could appeal to that consumer. Even loyal customers may be wary of dining in a restaurant that has been front page with product concerns, until a substantial amount of time and headline risk has passed.
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