10 restaurant chains targeted for takeout
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Amid reports that Burger King might be making a bid for Tim Hortons, we've compiled a list (above) of 10 actively traded stocks of North American restaurant chains that could be takeout targets.
The main criterion is recent sales growth. For slow-growth companies, the trend of selling 'non-core' businesses, even very profitable ones, could be changing.
The conventional wisdom is that non-core subsidiaries can distract management from a company's main business and that unloading a profitable subsidiary can 'unlock value,' when its stock is traded publicly. But that strategy could become a thing of the past, at least in the fiercely competitive chain-restaurant business.
Shares of Burger King Worldwide Inc. rose as much as 17% today, following reports that it was considering making a bid for Tim Hortons Inc. That combination could give Burger King a major tax advantage, as well as a new route for growth. Shares of Tim Hortons were up as much as 21%.
The prospective deal underscores the success of Tim Hortons in building its business, mostly in Canada, as well as Burger King's need to move beyond hamburgers to better compete with Dunkin' Donuts (held by Dunkin' Brands Group Inc. ), Starbucks Corp. and McDonald's Corp. for consumers' breakfast dollars.
There has also been speculation in the media that McDonald's, which is struggling, might consider buying Chipotle Mexican Grill Inc. McDonald's was the largest shareholder of Chipotle before selling its shares in 2006. Shares of Chipotle have rocketed 678% in the past five years.
Other potential targets
In order to list other restaurants that could be takeout targets, we began with a list of companies with headquarters in North America for which stock-price information was available from FactSet. We then narrowed the list to stocks with average daily trading volume of at least 50,000 shares.
One easy way of showing which restaurant operators are firing on all fryolators is to look at growth of sales per share. Potential acquirers would focus on comparable-sales growth, overall revenue growth and cash flow. But individual shareholders are always concerned with sales per share, because it not only shows the overall growth trend, it incorporates the increase or decrease in the share count caused by the issuance and repurchase of stock.
Looking at the table above, Chipotle and Tim Hortons top the list.
Here's a look at stock performance for this group of fast-growing restaurants:
Chipotle and Tim Hortons have been the strongest 2014 performers, even before both stocks popped today.
But it hasn't been such a great year for restaurant stocks. The S&P 500 Restaurants subsector was up 2% this year through Friday, while the S&P 500 Index was up 8%.
Popeyes Louisiana Kitchen Inc. is the only other stock that has risen this year, up 2%. For its fiscal second quarter ended July 13, the company said comparable sales rose 3.6% from a year earlier, and that it had opened 36 new restaurants, including 20 in the U.S. But Popeyes said expenses were rising faster than revenue. Therefore, second-quarter earnings per share were unchanged from a year earlier even after accounting for stock buybacks.
Here are forward price-to-earnings ratios for the group, based on consensus 2015 earnings estimates among analysts polled by FactSet:
The cheapest stock on the list, on a forward P/E basis, is Cheesecake Factory Inc. Second-quarter revenue and expenses grew at the same pace - 6% - while EPS rose to 59 cents from 52 cents a year earlier. EPS and sales per share showed the dramatic effect of stock buybacks, which lowered the average share count by 7%.
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