3 Restaurants These Analysts No Longer Have An Appetite For

Analysts at Wedbush took a deep dive into the restaurant industry to gain a better understanding of recent trends. During the second quarter, the quick-service restaurant sub-sector realized a 1.6-percent growth rate, fast casual was down by 0.1 percent and casual dining performed the worst and negative 0.8 percent, the firm's Nick Setyan commented in a research report.

Looking forward to 2018, these trends are likely to continue, with the QSR group outperforming and the fast casual and casual dining group remaining under pressure. As such, the fast casual and casual dining sector will see pressure, especially when factoring in expectations for a mid-single-digit labor inflation along with a low-single-digit food cost inflation.

"We believe current fast casual and casual dining margin expectations are at risk," Setyan explained. "While we see the same inflationary pressures in the QSR category, given that most QSR names are primarily franchised, we view the QSR category as relatively insulated from lower margin revisions as we move into 2H:17 and into 2018."

The following rating changes were made as a result of the analyst's cautious stance on the fast casual and casual dining group:

• Setyan downgraded Habit Restaurants Inc HABT from Outperform to Neutral with a price target lowered from $19 to $14.
• Setyan downgraded Cheesecake Factory Inc CAKE from Outperform to Neutral with a price target lowered from $52 to $44..
• Setyan downgraded Shake Shack Inc SHAK from Outperform to Neutral with a price target lowered from $40 to $36.

At time of publication, shares of Shake Shack were down 4.31 percent at $32.16, Cheesecake Factory shares were down 0.87 percent at $41.24 and Habit Restaurants was down 5.17 percent at $12.38.

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