Despite the release of promising economic indicators for the US economy, in the last two months the US stock market has been wracked by volatility. The US Federal Reserve’s planned tapering of its quantitative easing program, and the People’s Bank of China’s reluctance to inject liquidity into China’s drying credit market have both roiled stocks.
Investors looking for companies whose success is only affected to a limited degree by the actions of central banks may look to the restaurant industry for opportunities. Although business at high-end restaurants may vacillate with the fortunes of wealthy investors, McDonald’s Corporation (NYSE:MCD) strong growth in the wake of the 2008 financial crisis showed that restaurants offering convenient and affordable food can succeed even amidst economic turmoil. Three restaurant companies that have enjoyed significant success in the last five years and are worth investor consideration are Chipotle Mexican Grill, Inc. (NYSE:CMG), Panera Bread Co (NASDAQ:PNRA) and Domino’s Pizza, Inc. (NYSE:DPZ).
Chipotle’s impressive arc of growth
Chipotle Mexican Grill, Inc. (NYSE:CMG)’s unique fast-casual dining experience has struck a chord with American consumers eager for fast, fresh and new dining exposure. In an age where many are skeptical of fast food, Chipotle’s commitment to providing sustainable and nutritional “food with integrity” has bred loyalty with millions of young Americans.
Initially fueled by a large investment from McDonald’s, since debuting in 1998, Chipotle Mexican Grill, Inc. (NYSE:CMG) has opened close to 1,500 restaurants in the US. In 2006, Chipotle Mexican Grill, Inc. (NYSE:CMG) went public and divested from McDonald’s yet continued its torrid rate of growth, increasing revenue by three times in the seven years since its IPO. Over the same time period, the company’s stock price appreciated by over 700%.
Reflecting the company’s impressive growth history and high expectations for continued growth, the company currently trades at a price-to-earnings multiple over 40. Strong future growth is forecast on account of the company’s vast opportunity for geographic expansion and exciting new product developments.
With only a handful of restaurants in Canada and Europe, Chipotle Mexican Grill, Inc. (NYSE:CMG) has yet to capitalize as its fast-food predecessors have on the international market for American fast food. Management does not expect rapid growth in international markets in the near future, but believes that the company can succeed internationally in the long run by “build[ing] up the business organically” with increased brand recognition and strategic store locations.
In addition to expansion of the Mexican Grill internationally, in June management revealed plans to open new locations of its ShopHouse Southeast Asian Kitchen, a fast-casual restaurant similar to the Mexican Grill in its focus on cheap, simple and fresh ethnic cuisine. ShopHouse has operated successfully in Washington, DC since 2011 and many forecasters project that it may one day become as ubiquitous nationally as Chipotle Mexican Grill, Inc. (NYSE:CMG).
Panera offers growth at a bargain
Like Chipotle, by offering an original menu containing cheap, fast, fresh and nutritional options (artisanal sandwiches, salads and soups), Panera Bread Co (NASDAQ:PNRA) has enjoyed astounding success. With an average annual sales growth rate of roughly 15%, the company’s value has tripled in just the last five years.
Panera Bread Co (NASDAQ:PNRA)’s management intends to continue to drive growth through new restaurant openings, expansion of the company’s catering business and enhanced marketing efforts. Though it already operates 1,650 restaurants, Panera Bread Co (NASDAQ:PNRA) plans to open over 100 additional restaurants in 2013, including international locations in Canada.
To further capitalize on two straight years of over 20% growth in its catering business, in 2013 Panera Bread Co (NASDAQ:PNRA) is enhancing its web-based ordering system and investing in a new sales-force management system. Last, with its “Live Consciously, Eat Deliciously” campaign, the company is increasing marketing efforts intended to strengthen the brand.
Panera Bread Co (NASDAQ:PNRA)’s strong growth rates and robust plans for expansion have resulted in many comparisons to Chipotle. With similar recent historical results and aggressive plans for future growth, the biggest difference between these two possible investments is their valuation. Panera trades at a price-to-earnings multiple of roughly 30, a premium on the industry but 25% less than the premium assigned to Chipotle.
Domino’s’ struggle for long-term growth
Since reinventing its pizza and launching a self-critical add campaign in 2009, Domino’s Pizza, Inc. (NYSE:DPZ) earnings and stock price have soared. More than doubling earnings per share between 2008 and 2012, Domino’s stock price has increased from under $4 in late 2008 to over $60 today.
Despite its extraordinary recent performance, a weak balance sheet and various strategic threats to the company’s continued revenue growth make Domino’s an unattractive investment.
At over $1.5 billion, Domino’s Pizza, Inc. (NYSE:DPZ) long-term debt is more than three times the value of the company’s $478 million in total assets. This places great stress on the company to continue growing revenue in order to service debt.
Confronted with strong competition, shifting consumer preferences and limited opportunities for international growth, Domino’s should be considered a long shot to significantly exceed the revenue growth it requires to service its debt. Indeed, in 2012, Domino’s grew sales by less than 2% while its long-term debt grew by more than 5%.
Domino’s Pizza, Inc. (NYSE:DPZ) faces fierce competition in the pizza industry from both large chains (primarily Pizza Hut and Papa John’s) and countless independent pizza parlors around the world. As pizza is already one of the world’s most popular dishes, unlike Chipotle and Panera, Domino’s will not grow by introducing novice customers to an innovative new product. Rather, Domino’s established competitors will constrain the company’s growth by competing over consumers essential to its growth.
Domino’s Pizza, Inc. (NYSE:DPZ) may also be affected by changing consumer preferences. Fast-food restaurants today must contend with consumers who are increasingly cognizant of the healthfulness of their meals. As its core business is the sale of medium pizzas containing close to 2,000 calories, Domino’s is threatened in a way that neither Chipotle nor Panera are by consumers’ growing health consciousness.
If Domino’s Pizza, Inc. (NYSE:DPZ) hopes to achieve growth by looking abroad, as Chipotle and Panera intend to, it will have to look farther afield than its younger competitors. Domino’s, the world’s largest pizza chain, is the most mature of these three companies and already operates in 70 countries worldwide. Any sizable increase in Domino’s international sales will not come easily, as it already has a strong presence in the accessible international markets to which Chipotle and Panera are now turning.
Panera takes the cake
With impressive historical earnings growth and robust plans for future expansion, Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera offer enticing investment opportunities. As a significantly cheaper stock with much of the same upside as Chipotle, Panera Bread Co (NASDAQ:PNRA) is a wise choice for an investor interested in the restaurant industry.
The article These Restaurant Companies Offer Stable Growth Amidst Market Turmoil originally appeared on Fool.com and is written by Colin Tweel.
Colin Tweel has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald’s, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald’s, and Panera Bread. Colin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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