CASUAL DINING ANOMALY

Despite the S&P 500 rising approximately 27.1% over the past year, casual dining stocks have meaningfully outperformed this index.  Around a month ago, we published a note titled “The Casual Dining Bubble.”  In this note we highlighted the rich valuations across the casual dining sector and questioned the quality of these multiples.  Since then, casual dining companies in aggregate have begun to underperform the S&P 500 and same-store sales estimates for 4Q have come down.  Needless to say, valuations are still at very high levels which we cannot support or explain within the context of a legitimate fundamental backdrop.  We are convinced casual dining stocks are in a bubble, but we do not know when this bubble will pop.

 

CASUAL DINING ANOMALY - CD Perform

 

CASUAL DINING ANOMALY - casual dining ebitda

 

CASUAL DINING ANOMALY - casual dining pe

 

CASUAL DINING ANOMALY - price to cf

 

 

Highlighted in the two charts below, casual dining sales and traffic trends have been anemic for over a year and a half.  Industry traffic has not had a positive month since February 2012.  These statistics suggest that such strong outpeformance of casual dining stocks over the last year is unwarranted.

 

CASUAL DINING ANOMALY - Black Box Sales

 

CASUAL DINING ANOMALY - Black Box Traffic

 

 

In the following chart, we compare the aggregate price performance and short interest of the stocks in our casual dining index.  Despite very weak fundamentals, short interest has been falling since late 2011.  The continuation of this trend suggests that investors don’t want to get in the way of the sectors positive momentum.  Being on the wrong side of a bubble can be costly, to say the least.

 

CASUAL DINING ANOMALY - Short Interest

 

 

Although 4Q same-store sales estimates have been revised down over the past month or so, we still believe they are too high.  4Q was supposed to be the bounceback quarter for the industry.  While it will be a stronger quarter sequentially, compared to 3Q, it will still be relatively weak on a historical basis.

 

CASUAL DINING ANOMALY - Casual Dining SSS

 

 

Despite the consensus expected recovery in 4Q, casual dining stocks have underperformed the S&P 500 over the past month and have meaningfully underperformed the index over the past week.  This could signal that investors are coming to their senses.  The majority of valuations across the sector are excessively high and unwarranted.  That being said, we expect to see significant downward multiple revisions in the space but, alas, we don’t know when this will happen.  Perhaps the last month has signalled the beginning. 

 

CASUAL DINING ANOMALY - outperformance changing

 

 

 

Howard Penney

Managing Director