Other table service restaurants include Applebee’s and IHOP owner DineEquity Inc (NYSE:DIN), Chilis owner Brinker International, Inc. (NYSE:EAT), The Cheesecake Factory Incorporated (NASDAQ:CAKE), and Texas Roadhouse Inc (NASDAQ:TXRH). The latter three have trailing earnings multiples in the 17-18 range, representing a substantial premium to where Darden trades. However, each of the three has been reporting rises in both revenue and earnings, with both being above 10% in the case of Texas Roadhouse. As a result there is a case to be made that these stocks are better values, and it’s certainly interesting to see a combination of earnings growth and a trailing P/E in the teens. Brinker also made our list of the ten most popular restaurant stocks among hedge funds in the third quarter of 2012 (see the rest of the top ten). Investors might want to learn more about them as a result. DineEquity trades at 16 times analyst consensus for 2013, and the company’s revenue has been in decline. 10% of the company’s outstanding shares are held short; we think it might be better to pass on DineEquity in favor of the other restaurants we’ve discussed.
It’s possible that the market has overreacted to Darden’s poor quarter, and that is likely what Lewis thinks has happened. The stock is cheap enough that the company could be a good value if it stabilizes, but we think that Brinker, the Cheesecake Factory, and Texas Roadhouse might be more reliable bets. They are more expensive, but the recent financial performance of these restaurants has been quite good.
Disclosure: I own no shares of any stock mentioned in this article.