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Your Cheapest Opportunity For Major Growth

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

When it comes to investing, I generally tend to stick with what I know.  For me that means mostly restaurant stocks.  My investment strategy leans towards buying into growth opportunities, rather than maturing companies.  Recently, my curiosity rose up within me (as it normally does), and I wanted to know what are the fastest growing restaurants out there.  While I'm sure you can find a little variance in the data, here are the top 10 that I found:

  1. Five Guy's Burgers and Fries
  2. Chipotle Mexican Grill
  3. Jimmy John’s Gourmet Sandwich Shop
  4. Yard House
  5. Firehouse Subs
  6. BJ’s Restaurant & Brewhouse
  7. Buffalo Wild Wings Grill & Bar
  8. Raising Cane’s Chicken Fingers
  9. Noodles & Company
  10. Wingstop

The most depressing thing about this list is that you can't invest in 6 of the top 10; they are not public companies.  That's really a bummer--I have wanted to get in on Firehouse Subs for several years now.  I hail from the Jacksonville area myself (Firehouse's home base) and have always felt it was something special.  And who wouldn't want to get in on Five Guys?

I suppose we shouldn't dwell too long on what we can't invest in, and rather turn our attentions to what we can invest in.  We can invest in Chipotle Mexican Grill (NYSE: CMG).  We can invest in Yard House through new owner Darden Restaurants (NYSE: DRI).  BJ's Restaurants (NASDAQ: BJRI) is investable, as is Buffalo Wild Wings (NASDAQ: BWLD).  Here is the question I want to answer with this article: which of these growth companies presents the best value investment opportunity?

There are many areas we could explore to answer our question, but I would like to focus on three in which to compare our growth stocks.  The three areas are: 

  1. Price to Earnings
  2. Long Term Debt
  3. Earnings Per Share

Price to Earnings 

I like the price to earnings metric for evaluating a stock's value for several reasons.  It shows the net income, often a more helpful metric than gross income.  It also shows what the company is currently valued at.  It's very objective because it looks at real numbers, not estimates.  However, estimates aren't completely irrelevant.  That's why I also like to look at future price to earnings, although I don't cling to that number as tightly since it is, after all, an educated guess.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Price to Earnings</strong></td> <td><strong>Future Price to Earnings</strong></td> </tr> <tr> <td>Chipotle Mexican Grill</td> <td>30.48</td> <td>25.20</td> </tr> <tr> <td>Darden Restaurants</td> <td>14.05</td> <td>11.70</td> </tr> <tr> <td>BJs Restaurants</td> <td>28.21</td> <td>24.66</td> </tr> <tr> <td>Buffalo Wild Wings</td> <td>25.48</td> <td>20.40</td> </tr> </tbody> </table>

When looking at these P/E ratios, at first glance Darden Restaurants seems the clear winner.  However, you must keep in mind that while Yard House is growing at a fantastic rate, it is but one restaurant in Darden's quiver.  Darden's other restaurants, such as Longhorn Steakhouse and Olive Garden, aren't growing at nearly the rate that these four companies are growing.  Darden is committing much of their growth plans to Yard House, as I outlined in a recent article, but the company as a whole is not growing that fast.

When it comes to the P/E ratio, both Chipotle and BJ's enjoyed a much higher valuation just a few short months back.  With the first whiff of slowing growth (although still top 10) investors fled, bringing each company's valuations down to their current levels.  It's possible that things have now normalized.  However, if you glance down to the chart below, you can see that Buffalo Wild Wings has enjoyed a much more reasonable and stable valuation historically.

<img src="http://media.ycharts.com/charts/c1086ec45c3316f5753c280b6f3b5925.png" />

CMG PE Ratio TTM data by YCharts

Given the rate at which Buffalo Wild Wings is growing, and given its historical P/E ratio combined with its current and future P/E ratio, I think that Buffalo stampedes the competition in this category.  

Long Term Debt 

A company can be growing by leaps and bounds, but how sustainable is the growth?  While not a complete picture, I like to look at a company's long term debt for that one.  I want to know how overextended a company is, as any unforeseen event could bring it crashing down.  I guess we could say "growth at what cost?"

<img src="http://media.ycharts.com/charts/9724ff7edbee3a06edd6c31591c1438b.png" />

CMG Long Term Debt data by YCharts

I almost didn't include this chart.  There's not much to look at, but there lies the beauty of it.  The best long term debt to have is no long term debt.  As this chart shows, Darden Restaurants has a considerable amount of debt.  That doesn't necessarily mean that the company is in grave danger, but I think it is always better to invest in a company with no long term debt if given the option.  Debt ties a company down, and limits what they might like to do.  With no debt to pay back, they are free as a bird to keep growing and delivering the profits to shareholders.

I am extremely impressed that 3 of the 10 faster growing restaurants are doing so with no debt.  BJ's Restaurants, Chipotle, and Wild Wings have all been able to get it done in this category.  They have no one to pay back.  No creditors limiting future growth.  This metric is undoubtedly a three-way tie.

Earnings Per Share 

When we talk about earnings per share, we take the amount of money that the company made and divide it by the number of shares that exist.  That way you end up with a number that reflects how much money your individual share "makes".

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Earnings Per Share</strong></td> </tr> <tr> <td>Chipotle Mexican Grill</td> <td>$8.60</td> </tr> <tr> <td>Darden Restaurants</td> <td>$3.65</td> </tr> <tr> <td>BJs Restaurants</td> <td>$1.18</td> </tr> <tr> <td>Buffalo Wild Wings</td> <td> <p>$2.90</p> </td> </tr> </tbody> </table>

It's important to keep in mind that this metric is linked to share price.  Chipotle Mexican Grill has the highest earnings per share, but also has the most expensive shares.  If you just look at the earnings per share and the share price, you end up with price to earnings, which we already looked at.  The reason I want to look at earnings per share is because it can be an indicator of shareholder value.  So rather than just take this number at face value, let's look at who has been able to increase shareholder value the most over the past 5 years.

<img src="http://media.ycharts.com/charts/85946affc5918cb962e18ce63d44d613.png" />

CMG EPS Diluted Quarterly data by YCharts

Chipotle Mexican Grill outpaces the competition is this category.  Earnings per share have soared over 300% in the past 5 years.  Both BJ's and Buffalo Wild Wings have increased around 70%.  Meanwhile, Darden has stagnated in this category, and has actually turned to a -3%.

And The Winner Is...

Which of these growth companies presents the best value investing opportunity?  When looking at these three metrics, I think the winner is Buffalo Wild Wings.  When you consider the future growth, current valuation, small debt burden, and earnings per share, Buffalo emerges as a value investing opportunity.  Also, based on what we have looked at I think a good runner up is Chipotle Mexican Grill.  I would also have to give BJ's an honorable mention.

Despite the opinions to the contrary, there are still value investment opportunities to be found on Wall Street.  As value investors, with a buy and hold strategy, we must be ever vigilent to identify these value investing opportunities.


thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of BJ's Restaurants, Buffalo Wild Wings, Chipotle Mexican Grill, and Darden Restaurants. Motley Fool newsletter services recommend BJ's Restaurants, Buffalo Wild Wings, and Chipotle Mexican Grill. 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.

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