The U.S. restaurant industry has been very competitive. The outlook for the restaurant industry for the rest of the year is positive-primarily because of an increase in the same store sales of the players in this industry and stable food inflation. According to a report by the U.S. department of Agriculture, food inflation is expected to be around 2.5-3.5% in 2013, declining from the prior expectation of 3-4%.
A recent survey by the National Restaurant Association revealed that the Restaurant Performance Index (RPI) was 101.0 in April; the highest in the last 10 months. There have been companies like Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) that have been consistently rewarding its shareholders. According to the National Restaurant Association, as much as 41% of the restaurant operators are expected to see an increase in their sales in the later part of this fiscal year. The National Restaurant Association estimates a 3.8% (year over year) increase in total restaurant sales to $660.5 billion in 2013. I have selected 3 restaurant companies- Starbucks Corporation (NASDAQ:SBUX), Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) – all of which have great potentials for long term gains.
What makes Starbucks a solid investment?
Business expansion plans-
This Seattle based company has over 18,000 outlets in more than 62 countries. Apart from offering high quality coffee in its outlets, Starbucks Corporation (NASDAQ:SBUX) has been venturing into new business segments-tea, juice, packaged meals, etc. In 2010, it acquired Evolution Fresh juice brand. Earlier in 2012, it acquired La Boulange Bakery Brand to increase its food offerings. It completed the acquisition of Atlanta-based Teavana Holdings towards the end of the fiscal year 2012. This $620 million cash deal makes the 300 unit Teavana retail chain a wholly owned subsidiary of Starbucks Corporation (NASDAQ:SBUX). It aims to “re-invent the way the world enjoys tea.” It also plans to add tea bars to Teavana stores which will serve handcrafted beverages.
An addition to its business expansion plans is- it plans to serve coffee in European offices as well. The idea is to set up coffee bars in offices across Europe, where employees can have Starbucks Corporation (NASDAQ:SBUX)-coffee from the vending machines installed. This business plan spreads across France, Germany, Austria, Denmark and Finland.
Impressive earnings and valuation-
After being hit by recession, Starbucks Corporation (NASDAQ:SBUX) has been recovering well. For the last fiscal year, it reported company-wide same store sales of around 7%. Its sales in the Asian region has been impressive-a whopping 15%. Starbucks Corporation (NASDAQ:SBUX) is trading at a P/E ratio (ttm) of 33.64. Even though it might look a little over-valued with regard to its P/E multiple, with a quarterly growth rate of 11 percent, it is surely a solid investment. The strong earnings growth rate is also supported by a strong balance sheet. It has debt-equity ratio of only 10 percent. Moreover, it is trading at a price to sales ratio of 3.52-as compared to the industry average of 8.44- giving it a lot of scope to grow. The company has also revised its full fiscal year EPS target to $2.12-2.18 from the previous target of $2.05-2.15.