Looking in the Back of a Restaurant for a Good Return

By Tyler Crowe - July 31, 2012 | Tickers: CMG, MCD, PNRA, SBUX, SYY, UNFI | 0 Comments

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When you think about making a solid pick among restaurant stocks, you are probably thinking about a giant like McDonald's (NYSE: MCD).  It would be hard to argue against.  They have been been one of the best performing companies for the past decade and also pay a generous dividend.  Or, perhaps you are looking to get in a faster growing comany, then one of the a rising stars like Chipotle Mexican Grill (NYSE: CMG) or Panera Bread (NASDAQ: PNRA)is more up your alley.  With projected annual growth rates hovering around 20% for the year and possibly next, they have paid off very well for some of their early investors and continue to be a solid buy.  Of course these are the stocks you are going to think of! These companies are part of our everyday lives. It’s hard to pass a street corner without running into one of those three I just mentioned, and don’t get me started on how many Starbucks there are in my neighborhood.

Now, what if I were to ask you which restaurant you are going to pick for your next night out? The words Big Mac and romance don’t exactly add up. It’s very likely you will choose some local place on the corner, and it’s also likely this place doesn’t have a stock ticker on a major index.  Let’s add up all of those local restaurants, diners, cafés, and bistros.  That is a huge market!

This is what makes companies like Sysco (NYSE: SYY) and United Natural Foods Inc (NASDAQ: UNFI) such a successful business model.  Much to the chagrin of foodies like me, many of the chefs for restaurants are not headed to the local farmers market in the morning to get the freshest products possible.  Rather, they are receiving huge orders from purveyors like these on an almost daily basis.  These food wholesalers are, more or less, the backbone behind many restaurants both big and small.     

The Meat & Potatoes on these stocks

End of the fiscal year reports will be coming out for Sysco on the 13^th of August.  At the end of the previous quarter, despite marginal earnings growth, they saw a near 8% growth in revenue.  They took a big hit in their margins in large part due to a 5.5% increase in food costs.  Food cost inflation is still relatively high, but they are also in a good position with their market share to transfer many of those price changes to their customers. 

Sysco is a great dividend play. Their healthy 3.8% yield could curb the appetite for even the largest income investor.  The payout ratio for the company is teetering up there at 41%, but all in all it is a business model which doesn’t require huge levels of capital to keep afloat.

If you are looking for a more growth oriented stock in the category, then United Natural Foods may be more up your alley.  United Natural Foods is starting to carve out a more specific niche within the food wholesaler market by catering to clients who are looking for organic food.  Delivering a premium product will really help them in staving off those rising food costs.

 Source: Yahoo! Finance

Growth like that is impressive.  It should not come as a shock, though, the movement in the restaurant industry towards organic and healthier menu options plays right into their hands.

Reading the Tea Leaves

According to recent reports from the National Restaurant Association, the industry as a whole is expected to rise at a rate of about 1.7% for the rest of 2012, nearly double national GDP estimates.  This bodes well for nearly all aspects of the restaurant and food business. With the demand for restaurants still on the rise, so too will be the need to supply those pantries and meat lockers.  Look for Sysco and United Natural Foods to ride this wave throughout the rest of the year.

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