Restaurant Sales Rise: 3 Stock Picks
After declining by 0.3% in September, retail sales rebounded in October. The increase in retail sales is attributable to two major reasons. Firstly, employment is rising steadily and has boosted consumer confidence. Additionally, plunging oil prices has increased the share of disposable income, which consumers can spend elsewhere. Restaurants have emerged as the biggest beneficiary of these factors.
Restaurant Sales Rise
Retail sales rose 0.3% in October, in contrast to September’s 0.3% decline. The metric also came in ahead of the consensus estimate of 0.2% gain. Restaurants were among the major beneficiaries, with sales at food services and drinking places rising 0.9% from September. This is also higher than the 0.7% increase experienced in September.
In fact, food service sales have surged 7.1% over the last three months, compared to the year-ago period. Additionally, expenditure at bars and restaurants increased for the sixth successive month. Spending on eating out increased at an annualized rate of 9% over the same period. This is the fastest increase in three years.
Oil Prices Plunge
On Monday, the national average price of gasoline hit $2.89 per gallon. This is the lowest figure recorded since Dec 2, 2010. The national average price of gasoline has now been under $3 for 16 days. Over 75% of gas stations across the U.S. have reported prices below this level.
According to several economists, a 1 cent decline in the price of gasoline per gallon increases the country’s disposable income by $1 billion. Gasoline prices have witnessed a spectacular decline from a high of $3.7 in June. Additionally, it is unlikely that lower gasoline prices will result in higher savings. This is because the individual savings rate is at 5.6%, its highest level in two years. This gives consumers enough room to spend more.
Hiring, Consumer Confidence Surge
Total nonfarm payroll employment increased 214,000 in October, less than the consensus estimate of an increase by 235,000. However, the economy added in excess of 200,000 workers for nine successive months, a figure last achieved in 1994. This year the economy added an average 229,000 jobs a month, the fastest pace since 1999. October’s reading also followed an upward revision of nonfarm payroll employment in the previous two months.
Meanwhile, many companies added workers for the upcoming holiday season. As a result, the unemployment rate edged down to 5.8% in October from September’s 5.9%. This is the lowest figure recorded since Jul 2008.
Moreover, a preliminary report showed that the University of Michigan/Thomson Reuters consumer-sentiment index rose to 89.4 in November from 86.9 in October, beating the consensus estimate of 87.6. This was also the highest reading of the index since Jul 2007.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
DineEquity, Inc. (DIN) operates and franchises two restaurant formats. One of them is in the casual dining category -- Applebee's Neighborhood Grill & Bar. The other format is in the family dining category -- International House of Pancakes (:IHOP). The company has more than 3,600 restaurants across 17 countries. It has more than 400 franchisees and around 200,000 company and franchisee employees.
DineEquity holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 11.1%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 20.09.
Darden Restaurants, Inc. (DRI) is one of the largest casual dining restaurant operators worldwide. The company has operations in the United States and Canada with a total of 1,504 restaurants. The company owns and operates restaurant chains, primarily under the names of Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s and Yard House.
Apart from a Zacks Rank #2 (Buy), the company has expected earnings growth of 32.4%. It has a P/E (F1) of 24.84x.
Sonic Corp. (SONC) franchises and operates the Sonic Drive-Ins chain across the U.S. The company has two operating segments, franchise operations and company drive-ins. With more than 3,500 drive-ins across the country, Sonic has the largest chain of drive-in restaurants in the U.S. It caters to around 3 million customers on a daily basis.
Sonic Corp. holds a Zacks Rank #2 (Buy) and has expected earnings growth of 18.8%. It has a P/E (F1) of 25.14x.
Industry watchers believe that the trend of higher expenditure at restaurants is likely to continue. In fact, most restaurants have witnessed a slower decline at the end of summer. Given these factors, adding these stocks to your portfolio would be a prudent choice.
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