Services

Jefferies Has 4 Red-Hot Top Consumer Discretionary Restaurant Buys for 2017

Lee Jackson

Published: January 5, 2017 10:05 am

Last Updated: January 12, 2020 4:08 pm

Like many sectors in the S&P 500, the consumer discretionary, and especially the sub-sector of restaurants, had a nice run following the election as investors considered the favorable potential from the incoming Trump administration. With many seeing the positives for corporate and personal tax cuts, the natural response is to seek ideas in areas that benefit the most.

In a new research report, Jefferies concedes that the market is discounting the tax cut and lower regulation scenarios, but the firm also notes that near-term fundamentals for many of the top companies in the restaurant arena are difficult. The report notes that same-store-sales during the holiday season may prove to be challenging, citing the weather and the calendar.

With restaurant stocks finishing 2016 up 5% versus the S&P 500, the caution level remains high. However the company focuses on four top new money buys for 2017, and all are very well positioned in their arenas.

Starbucks

The retail giant has traded sideways for the most part since this time last year and could be poised to breakout. Starbucks Corp. (NASDAQ: SBUX) operates as a roaster, marketer and retailer of specialty coffee worldwide. Its stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single-serve and ready-to-drink coffee and tea products, juices and bottled water.

The company also licenses its trademarks through licensed stores, as well as grocery and national foodservice accounts. The company offers its products under the Starbucks, Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange, Ethos, Starbucks VIA, Starbucks Doubleshot, Starbucks Refreshers and Starbucks Discoveries Iced Café Favorites brand names.

The report noted this:

A rare play in the large cap space given solid visibility and growth opportunity. We expect ongoing investments to create a unique digital ecosystem for its rewards program to support continued strong same-store-sales (SSS), which along with favorable commodity costs, should offset currency and investments in growth. Near-term SSS likely more in +4% range in Americas, but EPS growth still expected to be 15%+ in ’17.

Starbucks shareholders are paid a 1.8% dividend. The Jefferies price objective for the stock is $65, and the Wall Street consensus target is $64.91. The stock closed on Wednesday at $55.99 per share.

Panera Bread

For the better part of the past three years, this company was a top momentum stock. A recent sell-off offers a favorable entry point. Panera Bread Co. (NASDAQ: PNRA) is an upscale fast-casual chain with more than 2,000 stores in 45 states. Besides its fresh-baked bread, menu offerings include made-to-order sandwiches, salads and soups, pasta, flatbreads, as well breakfast items. Panera’s system is 55% franchised and 44% company-owned. The company has developed into an industry leader in driving digital sales that increase restaurant sales capacity.

The analyst commented in their research report:

Fundamentals appear to be improving, with visible same-store-sale drivers in place; however, questions about slower traffic trends in third quarter appear to be weighing on the stock recently (and the question of how best to measure frequency for a business model that has shifted so rapidly to digital orders & high-ticket delivery/catering/RPU channels). Although only modest EPS growth in ’16, and the potential magnitude of the EPS ramp in 2017 remains uncertain (guide is simply “double digit growth”), we think 15%+ growth is realistic and that investors should reevaluate the likelihood that EPS estimates are depressed.

Jefferies has a $245 price target for the stock, and the consensus target is posted at $234.05. The stock closed most recently at $207.39 a share.

Jack in the Box

This company is a top fast-food offering for traders and investors to consider. Jack in the Box Inc. (NASDAQ: JACK) operates and franchises Jack in the Box restaurants, one of the nation’s largest hamburger chains, with more than 2,200 restaurants in 21 states and Guam. Additionally, through a wholly owned subsidiary, the company operates and franchises Qdoba Mexican Eats, a leader in fast-casual dining, with more than 600 restaurants in 47 states, the District of Columbia and Canada.

To counter McDonald’s all-day breakfast promotion, the company recently launched its new all-day “brunchfast” menu on September 28, 2016. The menu features items such as the bacon and egg chicken sandwich, the brunch burger and the southwest scrambler plate.

The Jefferies report noted:

Favorable California exposure, accelerating return on invested capital, and opportunity to see improving SSS at both brands in fiscal 2017 as more balanced promotional lineup and new food news moves the needle (burger platform at Jack in the Box and new offerings at Qdoba with new mobile app & affinity program on the way).

Shareholders are paid a 1.47% dividend. The $127 Jefferies price objective compares with the consensus target price of $113.57. The stock closed most recently at $108.98 a share.

Dave & Busters

This top chain continues to be a favorite across Wall Street as millennials and those in Generation X love to spend time there with friends and family. Dave & Buster’s Entertainment Inc. (NASDAQ: PLAY) owns and operates entertainment and dining venues for adults and families in North America. Its venues offer a menu of “Fun American New Gourmet” entrées and appetizers, as well as a selection of non-alcoholic and alcoholic beverages and an assortment of entertainment attractions centered on playing games and watching live sports, and other televised events. As of December 6, 2016, it owned and operated 88 stores in 33 states and Canada.

The analysts commented:

Our favorite new unit growth story with an underappreciated, differentiated brand and business model with no real direct competitors. We expect this to work to the company’s advantage as we move later in the cycle, which along with continued focus on new, proprietary games/amusements backed by marketing, should drive growth and broad based brand awareness to support incremental SSS and margin leverage on 50%-60% flow-through. New unit growth of 10%+ has been very productive as well.

The Jefferies price target for the shares is $65, while the consensus target is listed at $59.43. The stock closed most recently at $57.31.

While these appear to be the absolute best companies to look at now, all have had some big moves higher. Investors may want to buy partial positions here and see if we don’t get a correction at some point in the first quarter.