FULL SERVICE VALUATION

The Full Service Restaurant sector is down -25.2% over the past month, as compared to the QSR sector down -14.0%. Over the same time frame, only one stock in the FSR sector has outperformed the S&P 500 (EAT), as compared to 11 names in the QSR space (DNKN, CBOU, MCD, DPZ, THI, GMCR, YUM, PZZA, WEN, PEET, BAGL and SBUX).

The themes that are leading to the relative outperformance in the restaurant space are:

  • Coffee stocks
  • Pizza stocks
  • Turnaround stories
  • Exposure to China

Looking at recent history, the FSR space looks to be cheap, trading at 6.0X EV/EBITDA (NTM).  The group is right in the midpoint of the trailing-three-year range with 30% upside to the last peak in March of 2010 and 33% downside to 4.2X set back in November of 2008. 

We are certainly not making the call that we are headed back to the multiples we saw in 2008, but we also don’t know what the “demand destruction” is going to look like from the current market turmoil and the consumer confidence numbers hitting economic climate and the ugly consumer confidence numbers.

Last week, the University of Michigan index confidence fell 8.8 points to 54.9 versus 63.7 in July.  The index has fallen 19.4 since May 2011 and the magnitude of the decline has been exceeded only twice in the history of the index - fall of 1990 and 2005.

As I wrote last week, the potential for Recession 2.0 now looms large, but we are not seeing any damage to the trend line sales numbers – yet.  The official Malcolm Knapp data will be out this weekend, but the number (labeled as Knapp Track Casual Dining Index for July) in the BOBE press release this week implied a stable-to-slightly higher two-year average trend last month.

The prominent issue the industry is facing today is top-line demand destruction, right at the time we are seeing inflation in the P&L start to peak.  As we saw in yesterdays CPI data, the industry is very cautious about raising prices especially relative to supermarkets.  I would bet that it’s going to be even harder now to push through incremental pricing.

As we like to say, valuation is not a catalyst, but using the metric simply as a reference point would suggest that valuation is getting closer to suggesting that some opportunities may be brewing on the long side.  For now, though, we are waiting and watching.  That said, I still favor EAT, BWLD, and KONA right here and now.

FULL SERVICE VALUATION - casual dining multiples

Howard Penney

Managing Director

Rory Green

Analyst