The nation's 400,000 or so restaurants fervently hope Americans are confident enough about the economy to start eating out regularly again. Meanwhile, Wall Street analysts, realizing that a quarter of those restaurants belong to chains, hope this confidence translates to good prospects for restaurant stocks.
The summer decline in air fares has provided near-term thrust, with more travelers dining out. Food and labor costs remain stable, helping the price of doing business. At the same time, low interest rates and real estate costs encourage expansion moves.
But not all restaurants will benefit. The value-conscious consumer is cautious.
"As the economy improves and consumers decide to splurge, they'll seek a family dining atmosphere with low prices," predicted Thomas Graves, analyst with Standard & Poor's Corp. "Those chains will benefit most, and so will their stock prices."
Italian food and chicken are big growth areas.
"Casual dining restaurants are growing in popularity because the variety in their menus pleases health-conscious consumers, taking business away from fast-food chains," explained Remy Fisher, analyst with Kemper Financial. "With an average check price of $8 to $10, they are clean restaurants conveniently located in malls and off interstate expressways."
After a big run-up early this year, some stock prices have taken hits. Even analysts who consider many prices still too expensive are sold on long-range investment opportunities in these cyclical, often volatile, equities.
"Long-term, restaurant chains can earn an excellent 30 to 50 percent return on investment for a store unit," said Jeffrey Ubben, analyst with Fidelity Investments. McDonald's Corp. is a stock recommendation of Graves and Fisher, even though most fast-food stocks are out of favor. Development of overseas restaurants is strong, with a weaker U.S. dollar and improving efficiencies assisting profits.
Spaghetti Warehouse is a suggestion of Fisher and Ubben. A family-style Italian restaurant, it has low operating costs and superb profit margins.
Ryan's Family Steak House is a pick of Graves and Ubben. This 185-unit chain, primarily in the Southeast, has been increasing revenues by adding bakery bars in restaurants. Last year was its first down year in many years, but it's back on track with 16 percent unit growth.
Sbarro Inc., a chain of Italian restaurants in a turnaround situation with good earnings prospects and low stock price, is another Graves choice. So is Morrison Inc., a diverse food service firm with cafeterias and restaurant chains such as Ruby Tuesday. After stumbling a few years, it's been on a growth pattern since 1991. Au Bon Pain, a French bakery/cafeteria chain known for premier coffees and freshly prepared soups and salads, is a Fisher pick. Average check price is $6 to $7, making it a favorite with the budget-conscious. Cracker Barrel Old Country Stores, southern-style restaurants in prime locations along interstate highways, is another Fisher selection.
Brinker International (formerly known as Chili's), which offers casual dining at good prices and has a reputation for attracting young people with appetizers and a fun atmosphere, is a Fisher pick. So is Outback Steakhouse, enjoying a resurgence in interest in steakhouses with a menu that is 50 percent meat and 50 percent other items. It has a low average check price of $10 to $12.
ShowBiz Pizza Time, which Ubben calls "Las Vegas for kids," manages to turn in unit growth of 18 percent at the same time it's paying off debt of $10 million a year. A riskier recommendation is Checkers Drive-In Restaurant, which has an amazing unit growth rate of nearly 70 percent thanks to excellent burgers and diversified menu, said Ubben. The risk is that aggressive management is increasing the size of the chain too fast.