Just because we don't eat there . . .

Filet Mignon
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2006/02/23 02:42:57 (permalink)

Just because we don't eat there . . .

Doesn't mean we shouldn't try to make money there. Tonight CNBC stock guru (and IMHO, perhaps the funniest guy currently on TV after Jon Stewart) Jim Cramer said it is time to buy chain restaurant stocks:
Mad Money Recap
Cramer's 'Mad Money' Recap: Cheap Eats
By TheStreet.com Staff
2/22/2006 10:23 PM EST
URL: http://www.thestreet.com/funds/madmoneywrap/10269814.html

Hungry investors should chow down on restaurant chains, where high demand and low costs have set the stage for a bull market, Jim Cramer said on his "Mad Money" show Wednesday.
In addition to their advantages in marketing and scale, chain restaurants are feasting on demographics, Cramer said. "You've got more and more dual-wage households. Nobody has time to cook and even if they did it would be cheaper and easier to go out."
Chain restaurants have become less cyclical, in part because the cost of supplies like chicken, milk and corn are falling, Cramer noted. The sector is sitting on solid real estate and isn't burdened with high labor costs.
"None of these restaurants has a problem paying high wages," Cramer said. "They're mostly terrible employers who exploit the cheap labor of their employees."
"All this cost stuff says their margins should be improving. And when margins improve, stocks go higher."
Cramer told investors to look for chains with good concepts and room to grow, and as examples he named Cheesecake Factory (CAKE:Nasdaq) and Panera Bread (PNRA:Nasdaq) .
On Cheesecake Factory, Cramer touted the company's 23% revenue growth, 21% earnings growth and operating margins of 10.97%. He said that with only 103 restaurants, the chain is far from saturation.
"I've never seen a casual dining place with the kinds of lines this place has," Cramer said. "They have a great concept, which is to focus on dessert -- the only thing people actually care about."
A caller asked if health concerns could be a problem. Cramer said that while a secular trend toward healthier food may be in place, "There's always a niche for just going and getting something that tastes great."
Even though Panera has 877 restaurants, Cramer said, it still has a lot of untapped markets. The company is putting up "remarkable" same-store sales growth (7.7% in the fourth quarter and 10% in January). While most companies either expand units or focus on same-store growth, Panera "is doing both, and that's incredible."
Cramer praised Panera's 30.6% revenue growth, 36.2% earnings growth and $73 million in cash.
Cramer was also bullish on Darden (DRI:NYSE) and Domino's Pizza (DPZ:NYSE).
At Darden, core chains Red Lobster and Olive Garden have been reporting solid same-store sales growth and the company is poised for double-digit earnings growth in 2006. Cramer is mainly impressed with the company's 9.34% operating margins, about twice the industry average. He copped to being "skittish" about the company's $945 million in debt.

Cramer's case for Domino's is that it represents "compressed value" that compares well to rival Papa John's (PZZA:Nasdaq) . The company's expected 2006 EPS growth is 10.6%, similar to Papa John's, while its 13.2% operating margins are "way better," Cramer said. But Domino's is a cheaper stock.
At the high end, Cramer highlighted Ruth's Chris Steak House (RUTH:Nasdaq) , which turned in fourth-quarter same-store sales growth of 8.5%, thanks mainly to higher per-guest spending. "Even though existing stores are doing well, the new units are doing better," Cramer said. Throw in 13.8% operating margins and "steak mind share" that is superior to newly public Morton's (MRT:NYSE) , and the stock, while expensive, looks good.
Cramer also discussed Starbucks (SBUX:Nasdaq) , saying that even if the company's store unit growth has topped out in the U.S., it still has "plenty of room in the world to expand." Domestically, Starbucks can beef up its menu with lunch and breakfast items. Still, momentum traders have bid the stock up to "expensive" levels, Cramer warned. He recommended investors "stay on the sidelines and buy it when it gets hit."
Next up was Chipotle (CMG:NYSE) , which Cramer said has room to grow with only 500 stores. He said the company, with its best-of-breed food, has a lot of potential market share to take away from Taco Bell, and could also encroach on traditional chains like McDonald's (MCD:NYSE) and Wendy's (WEN:NYSE) .
Cramer's final pick was Luby's (LUB:NYSE) , which he called "not a great concept or a great restaurant." The shares could still be winners, however, due to solid cash flow generation ($20 million over the last 12 months) and the value of the real estate beneath 93 of the company's stores. Cramer said the property is being carried at $51 million on the balance sheet, a "low-balling."

Based purely on investment potential, I'm not real impressed with these picks. The three I do like (purely as an investment), Ruth's Chris, Starbuck's and Chipotle, are already fairly expensive stocks. Anybody else have any thoughts?

PS--Don't ask me why the font changed in the middle of that quote--I haven't a clue.

3 Replies Related Threads

    mr chips
    Filet Mignon
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    RE: Just because we don't eat there . . . 2006/02/23 06:32:46 (permalink)
    Starbuck's has extreme growth potential. Whether their stock goes up, another story.
    Filet Mignon
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    RE: Just because we don't eat there . . . 2006/02/23 13:56:43 (permalink)
    Originally posted by mr chips

    Starbuck's has extreme growth potential. Whether their stock goes up, another story.

    The "revealed" view on Wall Street is that they have little growth potential in the US because the market is pretty well saturated (and their actions such as the recent deal to put outlets in Giant Food stores--I am familiar with the ones in Safeways and they look ridiculous to me--suggests they are at the bottom of the idea barrell) but that their growth potential is mostly in China. That's great if it works but I get nervous when my future is at the mercy of Communist ideologues and bureaucrats.
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    RE: Just because we don't eat there . . . 2006/02/23 14:51:38 (permalink)
    Theres a new Starbucks getting set to open in Annapolis in the former location of the King of France Tavern in the Treaty of Paris Restaurant (theres already another about 2 blocks away). For years this historic tavern has been one of the only venues in town to feature live jazz. Now we get the baristas. I weep.
    Maybe historic sites are a new market segment for the purveyors of overpriced yuppy lattes. Is the Alamo really all that busy?

    Vayo con Queso
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