An improving economic scenario bodes well for the restaurant industry. These stocks have gained over the year and are poised for the further gains next year. Falling oil prices, lower food inflation and an improving labor market have combined to create an environment which is favorable for the sector.
GDP and Employment
GDP numbers bounced back in the second and third quarters, increasing by 4.6% and 3.9% (second estimate). Real personal consumption expenditure fueled growth on both occasions. GDP had contracted 2.9% in the first quarter of 2014. This was the worst performance in five years.
Additionally, the economy added the most number of jobs in November since Jan 2012. The economy also added a minimum of 200,000 jobs for 10 straight-months in November. This turned out to be the longest stretch in more than 30 years.
Also, the average hourly earnings of American workers increased 0.4% in November, more than the consensus estimate of a rise by 0.2%. Investors also focused on the other part of the data that showed unemployment rate remained at a six-year low of 5.8%.
Falling Oil Prices
For the last six months, crude prices have continued to move lower. The decline in oil prices was a result of Saudi Arabia’s decision to cut its supply price to U.S. customers in the face of abundant North American output. Experts believe that this move is aimed at Saudi Arabia trying to keep its market share in the U.S. while cutting down competitive pressure.
Brent crude price has slumped more than 48% since Jun 19. On Dec 16, Brent crude lost 2% to settle at $59.86 a barrel, its lowest level since May 19, 2009. On Dec 11, WTI Crude Oil had slumped 1.7% to settle at $59.95, its first drop below the $60 mark in five years.
Historical trends indicate that a continual fall in oil prices is beneficial for the restaurant sector. Along with the increase in employment and income, the slump in oil prices significantly increases the purchasing power of the consumer. Besides, the drive to a restaurant also becomes that much cheaper.
Lower Food Inflation
The Consumer Price Index (CPI) dropped 0.3% in November, witnessing its biggest decline since Dec 2008. The rate of decline was also wider than the consensus estimate of a 0.1% drop. Negative trend in oil prices seems to be the main reason behind this decline.
Meanwhile, corn and hog prices are expected to fall further. In September, corn futures slumped to their lowest level in five years. According to the USDA, corn prices are expected to move below $4 a bushel during the second half of next year and through 2016. This will result in a fall in the cost of feed and lower food costs overall. According to John Barone, president of Market Vision Inc., hog prices are expected to decline nearly 14.5% in 2015.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks rank and strong year-to-date returns.
Denny's Corporation (DENN) is the owner and operator of the Denny’s restaurant brand. The company has around 1,700 restaurants as of Feb 5, 2014. This includes, company owned, licensed and franchisee outlets as well as 100 restaurants in foreign countries. Denny’s is based out of Spartanburg, SC.
Denny's holds a Zacks Rank #2 (Buy) and has expected earnings growth of 18.5%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 26.83. The stock has gained 37.1% year-to-date.
Sonic Corp. (SONC) is the operator and franchiser of the Sonic Drive-Ins restaurant chain. The company operated around 3,518 Sonic Drive-In outlets across 44 states as of Aug 31, 2014. This includes 301 company-owned outlets. Sonic is based out of Oklahoma City, OK.
Apart from a Zacks Rank #2 (Buy), the company has current year expected earnings growth of 18.8%. It has a P/E (F1) of 26.10x. The stock has gained 29% year-to-date.
Cracker Barrel Old Country Store, Inc. (CBRL) is the developer and operator of the Cracker Barrel Old Country Store concept. These stores combine a restaurant with a gift shop and offer home style cooking for breakfast, lunch and dinner. The company operated 633 company-owned outlets as of Sep 18, 2014. Cracker Barrel is based out of Lebanon, TN.
Cracker Barrel holds a Zacks Rank #2 (Buy) and has expected earnings growth of 9.3%. It has a P/E (F1) of 21.87x. The stock has gained 22.3% year-to-date.
Higher growth and an improving labor market are good signs for the restaurant sector. A slump in fuel prices and the possibility of lower food inflation is also good news for such companies. Given these factors, adding these stocks to your portfolio would be a prudent choice.
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