The Three Restaurant Stocks at the Top of My Watch List
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’m continuing to build a watch list of companies that I am interested in adding to my paper trading portfolio that I call the “No Drip, No Mess” Portfolio. Today I am adding three fast growing restaurant stocks to my watch list and I’ll look to add one of these companies to the portfolio in the near future. I believe that each of these companies are still in the beginning of their growth stages and have the potential to reward investors for years to come.
The three companies I’ll be watching over the next three months are Arcos Dorados (NYSE: ARCO), Buffalo Wild Wings (NASDAQ: BWLD), and Chipotle Mexican Grille (NYSE: CMG). The following chart provides an overview of what I am watching at each company:
|Ticker||Market Cap||Revenue||2013 P/E||Current Stores||Potential Stores in the Next Decade||Competitive Advantage||Biggest Concern|
|ARCO||$2.7 Bil||$3.66 Bil||14.6||1,843||4,000||Exclusive McDonald's franchisor in Latin America||Currency fluctuations and inability to grow in Brazil|
|BWLD||$1.5 Bil||$784.48 Mil||20.7||832||1,500||Excellent at selecting great locations for their stores||Franchised locations continue to under perform company-owned stores|
|CMG||$12.6 Bil||$2.27 Bil||35.9||1,260||3,000||Quality of their food and their employee retention||Can ShopHouse be their next growth concept?|
I have been watching shares of Arcos for a while now and they have just been hammered over the past few months over concerns about growth, especially in its Caribbean and Mexican divisions. Additionally, they face currency headwinds in that they make sales in the local currencies but report in US dollars. Finally, if that wasn’t enough, they face inflation concerns, anti-business policies and mandated expenses.
Still, despite all of this Arcos has the seasoned management to go with its financial resources and brand power to seize the extraordinary opportunity that it has through its exclusive Latin American contract to own, operate and grant franchises of McDonald's (NYSE: MCD). To put their growth potential in perspective, McDonald's has over 33,000 restaurants and about half of those international. Arcos represents about 10% of their international restaurants and just 5% of their global count. With the population in Latin America nearly double that of the States you can see that they have decades of potential growth ahead of them.
In Buffalo Wild Wings we have a completely domestic owner, operator and franchisor of restaurants. Whereas Arcos' growth has been lumpy, BWW has consistently grown revenue and earnings at just over 20% the past five years. The stock has also been a consistent grower, as it has more than tripled from its financial crisis low. With the stock trading at a fair valuation and with the ability to double its store count over the next decade BWW should continue to produce consistent returns for investors. I will be watching how its franchised locations perform vs. corporate-owned stores as well as the price for wings.
Finally, with Chipotle we have another McDonald's spinoff that has been the top performer of the bunch. At over a $12 billion market cap it’s by far the largest and most expensive on a relative basis. However, they do have a more visible growth runway than either Arcos or BWW. Their concept not only has the potential to translate well overseas but it has the potential to translate into additional concepts.
Right now they are in the midst of testing their ShopHouse concept in DC and if successful it could boast similar growth characteristics as Chipotle. One of the reasons for their premium valuation is that they are growing earnings much faster -- at over 35% the past five years -- and have the a lot more upside over BWW in the longer term. I'll be watching how ShopHouse does as well as their new international locations -- any signs they aren't satisfying customers and shares could be joining Arcos on the value menu.
I have to admit, I am a huge fan of the food at Chipotle and hot wings are a favorite of mine so it will tough to stay unbiased when I add one of these three companies to the “No Drip, No Mess” portfolio. I’m not sure if the portfolio name alone automatically disqualifies BWW as the wings are pretty messy to eat! All that being said, it’s hard to not salivate at the growth potential coupled with the current valuation of Arcos Dorados, so this will be a tough choice as all three companies have market-crushing potential. Sound off in the comment box for which company you think should be added to the portfolio.
latimerburned owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of Arcos Dorados, Buffalo Wild Wings, and Chipotle Mexican Grill. Motley Fool newsletter services recommend Arcos Dorados, Buffalo Wild Wings, Chipotle Mexican Grill, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.