You Should Consider Buying One of These Restaurants

Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With food costs set to soar by 3%-5% this year, restaurants that are able to lower expenses or drive up prices without losing customer will come out on top. The relatively low barriers to entry in the industry put pressure on these companies to price their menu items attractively, something that can be hard to do with the current food-cost woes.

Texas Roundhouse faces pressure from rising beef prices

Texas Roadhouse (NASDAQ: TXRH) is in the mid-tier of prices for a meal, and increasing food costs could have the restaurant driving up its prices. Any increase could deter people from buying the company's steaks and have them going to a butcher instead. 

The steakhouse is more vulnerable to increased operating expenses than many other restaurants because of rising feed costs for livestock. This increases the price that the restaurant pays for its steaks. Feed cost inflation is pegged at 6.5% this year, which is in addition to a 6.4% increase in 2012 and a 3.5% increase in 2011.

Analysts don't agree that the company will struggle. They believe that the firm will increase its revenue by 12.7% this year and 11% next year. This could be due to the company's ability to expand to the western United States, an area where it currently doesn't have much of a footprint. The company had doubled its operations between 2003 and 2008, and now that the economy is back on track it could continue with its expansion plans. I wouldn't bank on it, however, and I am very wary of rising food prices, particularly the price of beef.

Brinker looks to lower operating expenses to battle rising prices

Brinker International (NYSE: EAT) is making a move to streamline its operations by improving the efficiency of its restaurants. This includes efforts to install new kitchen equipment. With this rollout, the company anticipates it will be able to reduce labor costs and food waste. 

With those additions scheduled to be finished at the end of this year, the company's cost savings will likely make a significant impact on its books next year. Investors may be able to see lowered expenses before 2014, however. The decrease in operating expenses could help the company manage increases in food prices without raising the cost for items on the menu and potentially losing customers. That could put it at a strategic advantage against its competitors, including Texas Roadhouse.

Analysts also have high hopes for the firm. They anticipate a 19% increase in earnings per share this year and another 18% next year. Revenue is expected to grow by only 1.1% and 2.9% in 2013 and 2014, respectively. This indicates that they also anticipate lower operating expenses due to the equipment makeover. 

Cheesecake Factory is confident

The Cheesecake Factory (NASDAQ: CAKE) is showing signs of confidence, and this should spark the interest of investors. The company recently raised its quarterly dividend from $0.12 to $0.14 per share. It also announced plans to repurchase $125 million in stock in the second half of this year. The company's cash flow of $195 million last year shows it is in a strong financial position for growth and to build value for shareholders. 

The firm is set to profit from a recent agreement that allows a company in Kuwait to develop 22 Cheesecake Factory locations in the Middle East. This represents more revenue that the company can garner from franchise industries. Best of all, the firm has little risk in this international expansion path, and it could provide a taste of doing business abroad with minimal capital investment.

Analysts anticipate that the company will experience moderate growth. This year, revenue is set to increase by 4.8%, and next year it is expected to reach 7.3%. Earnings per share are pegged to increase by 13% this year and 14.5% next year.

Where to put your money

With Brinker International doing whatever it can to lower operating expenses, I don't see increasing food prices significantly impact the firm. I would wait until the renovations to the kitchens are over before buying the stock, however, since expenses are high right now. Texas Roadhouse will have to lower its operating expenses or face what could be a loss of customers if the company raises menu prices. The price of feed is just too high, and that is raising the cost for steak. Out of the three companies featured here, the Cheesecake Factory looks to be the best investment. It is on solid ground because of its upscale experience where customers might not mind paying increased prices.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus