Invest in a restaurant that you enjoy

June 15, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Invest with your stomach.

That's the best advice for anyone considering purchase of stock in a restaurant company.

Well-managed, innovative chains featuring good-tasting food and enjoyable atmosphere are often likely to do well in their bottom line as well. Your family can do research by dining out.

The industry got off to a bad start in 1994 with harsh weather in many parts of the country keeping customers away. While that didn't affect stock of some of the larger firms, such as McDonald's Corp. and Wendy's International, it did take its toll on smaller chains.

Now, with many restaurant stock prices quite reasonable, improvement in the economy should provide a solid boost. In addition, after five years of price-cutting through "value menus," there may now be opportunity to increase meal prices a bit.

"These stocks are volatile, but if you believe in the concept and like the restaurant, buy the stock," advised Caroline Levy, analyst with Lehman Brothers. "You can make a lot of money in the restaurant group."

If you've bought a "RocDonald's" mug lately to celebrate "The Flintstones" movie or watched Wendy's Dave Thomas do his routine in TV commercials, you can see that eating out is big business.

"Since the 1920s, the restaurant industry has continued to make gains at the expense of the grocery industry," noted Peter Oakes, analyst with Merrill Lynch. "Just 25 years ago, one-third of food expenditures were made at restaurants, but that number has grown to nearly 50 percent today."

There are financial and governmental cautions in this $213 billion annual business.

"Better-capitalized companies with more experience will do best," predicted Steve Kent, analyst with Goldman Sachs. "The government could provide some short-term negatives, if health care reform and an increase in the minimum wage raise labor costs."

Yet that doesn't change fundamentals.

"Growth in casual dining is tied to demographic change, such as people getting married later, more single people, a greater number of working families and the maturing of the baby boomers," explained Harry Venezia, analyst with Raymond James.

Here are featured selections from the investment menu:

* Brinker International, best known for its more than 300 Chili's jTC Grill & Bar restaurants, is recommended by Kent and Levy. It also has the Grady's American Grill and the Romano's Macaroni Grill restaurants and recently acquired the On the Border chain. Considered the best opportunity in the casual dining industry, it could offer earnings growth of 20 to 25 percent a year.

* McDonald's Corp., with more than 12,000 restaurants worldwide, is a Levy selection. It has reduced the average cost of building a new restaurant to $1 million from $1.6 million by building smaller, more efficient units and taking advantage of reduced real estate prices. Sixteen percent annual earnings growth is expected. It's initiating satellite locations at airports, schools, gas stations and Wal-Mart stores. Forty percent of earnings come from overseas, which could grow to 60 percent in five years.

* Wendy's International, third-largest hamburger chain, with around 4,000 restaurants, is suggested by Levy. Largely a domestic chain, it intends to become more aggressive overseas. Dubbed the "most boring" restaurant company by Levy, it nonetheless has provided 20 percent annual earnings growth for five years.

* Ryan's Family Steak House, with more than 225 family-style steakhouses primarily in the South and Midwest, is an Oakes pick. He considers it the best of the steak house competitors, with 15 percent annual growth likely. It has begun an ambitious remodeling program.

* Sbarro Inc., which has around 650 cafeteria-style Italian restaurants in the United States and abroad, is recommended by Oakes. Situated primarily in shopping malls, it should have 17 percent annual earnings growth. Units that switched to a wider menu have experienced 50 percent sales gains.

* IHOP Corp., operator of the International House of Pancakes restaurants, is a Kent selection. The company has an incredible long-term track record of sales gains. A 25 percent annual growth rate is expected as it increases emphasis on menu selections for lunch and dinner and builds newly designed restaurants.

* Outback Steakhouse, with nearly 200 steakhouses and a handful of Carrabba's Italian restaurants, is favored by Venezia. This dinner-only chain gives its managers part-ownership and thereby attracts more experienced people.

* Apple South, the nation's largjest Applebee's restaurant franchisee, with more than 100 units in 17 states, is a Venezia pick. Specialties are hamburgers, chicken and ribs.

* DF&R Restaurants, which has Harrigan's steakhouses and Don Pablo's Mexican restaurants, was chosen by Venezia. Risk is greater than some other choices, but so is the potential gain, he believes.

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