US consumers may be slowly migrating to a more healthy lifestyle, but you can’t tell it by watching the performance of some of the nation’s largest (no pun intended) comfort-food restaurants. Despite an increased emphasis on educating the public on the dangers of obesity, many “unhealthy” restaurant chains represent very attractive investment opportunities.
Today, I want to take a look at three restaurants that are demonstrating rising sales, earnings growth, and attractive valuations. Over the next year, I expect all three of these stocks to advance, giving investors a very competitive return on their capital. Consider adding them to your portfolio today!
Krispy Kreme: Record revenue, exceptional growth
Krispy Kreme Doughnuts (NYSE:KKD) has turned in impressive revenue growth over the last several quarters as the company has done an excellent job of expanding its brand both domestically and internationally.
On May 30, the company beat expectations for the fiscal first quarter, and raised guidance for the full year. (Krispy Kreme Doughnuts (NYSE:KKD) operates on a Jan. 31 fiscal year end, so they are currently in the 2014 fiscal year).
For the quarter, revenue increased 11.7% over the prior year. Much more importantly, same-store sales were up 11.4% for the quarter. The positive same store sales metric allows Krispy Kreme Doughnuts (NYSE:KKD) to grow efficiently, adding low-cost revenue while the company continues to invest in new stores.
For the full year, management expects to generate $0.59 to $0.63 in earnings, well above the $0.53 to $0.57 guidance that had previously been offered. The high end of the range represents an increase of 34% over fiscal 2013 earnings.
As a general rule, management teams often issue relatively conservative guidance that is should be attainable. This way, if one or two challenging issues come up during the period, the company still has a shot at meeting estimates. Assuming no material change in consumer behavior, I would expect the company to generate at least $0.65 in earnings this year.
Investors should be willing to pay at least 35 times earnings, considering the attractive growth rate. This would put the stock at $22.75, more than 30% above the current price. Of course, if management continues to increase guidance, the premium valuation could be significantly higher.
Dunkin’ expands into new markets
Since the company’s IPO nearly two years ago, Dunkin Brands Group Inc (NASDAQ:DNKN) has been working hard to expand its geographic footprint.
Traditionally a northeastern chain, the company has launched a campaign to aggressively open new franchises across the US. The franchise concept works very well for Dunkin Brands Group Inc (NASDAQ:DNKN)’ because it allows the company to expand quickly without investing nearly as much capital into start-up costs.
At the end of 2012, the company had more than 10,500 Dunkin’ Donuts restaurants, along with 7,000 Baskin-Robbins franchises in operation. Just this week, Dunkin Brands Group Inc (NASDAQ:DNKN)’ announced that there would be nine new restaurants opening in Houston. The press release also acted as an advertisement of sorts, noting that there were plenty of additional opportunities to open franchises in Texas.
This year, analysts expect the company to earn $1.53 per share. In 2014, expectations are for $1.81 per share. This puts the company just under a 20% growth rate, which is exceptional, given the company’s $8.8 billion dollar annual revenue base.
Dunkin Brands Group Inc (NASDAQ:DNKN)’ also pays a dividend of 1.8%, making the company attractive in a low interest rate environment. The stock gives investors an excellent opportunity to participate in the growth of this rapidly expanding company, while still generating income from their investment.
