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Once, an editor at Restaurant Finance Monitor said that “If you were unemployed last month and this month you get a job, one of the first things you’re going to do is what? Go out and eat.” Restaurants, therefore, are likely to be the first ones to gain from improving economy and employment trends.
With more people choosing to dine out these days, it is needless to say that the restaurant industry is poised to benefit. As the economy recovers, fast-food restaurants will likely need to step up their game. From menu innovation to introducing digital platforms to providing healthy food, all these initiatives are targeted toward meeting consumer preferences. This, however, requires substantial capital.
While the big players are already sitting on a cash pile, the new entrants need to infuse capital into their business from time to time. An Initial Public Offering (IPO) of common stock thus acts as a medium for the relatively new players to raise additional funds.
Will the Current Market Turmoil Affect Impending IPOs?
While most of the restaurant stocks that debuted on the market recently traded much higher than the expected range after their IPOs, the recent turmoil owing to the Chinese stock market debacle could have an impact on the timing and valuation of future restaurant IPOs.
However, some market analysts say that it is too early to believe that the shaky market would cast a shadow on the IPO market. They expect the industry’s strong fundamentals and sales initiatives undertaken by the restaurants to steer them through tough times.
5 Restaurant Stocks that Exceeded Expectations After IPO
Wall Street has shown an increasing appetite for restaurant companies as of late. There have been a number of IPOs in the restaurant industry since the beginning of 2014, and the majority of them have been rather successful. Here we look at the performance of five restaurant stocks that have lived up to market expectations since they began trading.
Based in Texas, Zoe’s Kitchen, Inc. ZOES began trading on the NYSE in April 2014. Since then, the company has posted seven quarterly results. This fast casual Mediterranean cuisine restaurant has surpassed the Zacks Consensus Estimate for earnings in six quarters while matching the same in one. Over the trailing four quarters, the company has a positive earnings surprise of 97.92%. The company’s efforts to develop new menu items and its aggressive marketing campaigns to promote these contributed to growth. Zoe’s Kitchen is a Zacks Rank #2 (Buy) company.
Shake Shack Inc. SHAK, a New York City-based fast-casual restaurant that specializes in burgers, crinkle-cut fries, and custard shakes, began trading in January 2015. Since then, the company has posted better-than- expected results in all the four quarters that it has reported so far and has a positive average earnings surprise of 134.53%. Shake Shack’s cult following and successful expansion into various cities around the world are expected to boost comps going forward. This Zacks Rank #2 (Buy) company is positioned well to cash in on the surging popularity of the U.S. fast-casual market.
Wingstop Inc. WING specializes in cooked-to-order, hand-sauced and tossed chicken wings, and began trading in June 2015. Since then, the company has reported results for three quarters in which it beat the Zacks Consensus Estimate for earnings by an average of 20.87%. Driven by bold flavor offerings, large, value-oriented family packs, and meals for two and individual combo meals, domestic same store sales of the company grew 7.9% last year. Meanwhile, revenues and net income grew 15.6% and 12.5%, respectively, in fiscal 2015. Consistent expansion is another key growth driver for this Zacks Rank #2 (Buy) company.
Dave & Buster’s Entertainment, Inc. PLAY began trading in October 2014, and has posted five quarterly results so far, exceeding expectations every time. The company has an average positive earnings surprise of 101.23% for the trailing four quarters. The core concept of the company is “Eat Drink Play and Watch” at one location. Its menu comprises “Fun American New Gourmet” entrées and appetizers and a full selection of non-alcoholic and alcoholic beverages. This Zacks Rank #2 (Buy) company is scheduled to report its fourth quarter earnings on at the end of March.
The Habit Restaurants, Inc. HABT is a fast-casual restaurant that began trading on NASDAQ in November 2014. To date, the company has posted five quarterly results wherein it beat the Zacks Consensus Estimate for earnings each time. This Zacks Rank #3 (Hold) company has an average positive earnings surprise of 30.89%. Habit Restaurants is a popular burger chain that offers hamburgers, salads, sandwiches, shakes, and french fries. Its most popular item is the “Charbuger,” a 100% ground beef patty that comes dressed in mayo, pickles, fresh tomato, lettuce, and caramelized onions on a toasted bun.
What’s Driving These Stocks?
Besides a loyal customer base and successful expansion into various cities around the world, there are other factors that are driving sales of these restaurants. These include better-than-expected job growth along with strong construction spending, automobile sales and housing numbers, stabilizing energy costs, and rising consumer confidence.
The Restaurant Performance Index (RPI) that tracks the health and outlook for the U.S. restaurant industry stood at 100.6 in January, up 0.8% from December’s level of 99.7. The Current Situation Index that measures trends in four industry indicators—namely same-store sales, traffic, labor, and capital expenditures—stood at 99.7 in January, up 0.3% from the December level of 99.4.
Despite a mixed economic outlook, restaurant operators are continuing to plan for capital expenditures in the months ahead. 65% of restaurant operators plan to make a capital expenditure for equipment, expansion, or remodeling in the next six months, up from 52% of operators who reported similarly last month.
The industry is expected to sustain its general pace of recovery in the near term, albeit at a slower rate, as it contends with several global economic concerns.We believe that the ZOES, SHAK, WING, PLAY, and HABT, with their strong fundamentals and growth prospects, are capable of meeting investors’ expectations going forward.
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DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report
SHAKE SHACK INC (SHAK): Free Stock Analysis Report
ZOES KITCHEN (ZOES): Free Stock Analysis Report
HABIT RESTRNTS (HABT): Free Stock Analysis Report
WINGSTOP INC (WING): Free Stock Analysis Report
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