Use Any Pullbacks In Restaurant Stocks To Add Exposure: Baird

Baird sees any weakness in restaurant stocks as a buying opportunity as its checks show a rebound in industry comps after December softness and still believes the near-term fundamental outlook for limited-service chains (fast-casual, specialty coffee, QSR) is stronger than for casual dining.

“We see risk of uneven demand trends in February-March amid tax refund delays and tough upcoming weather comparisons; however, we would view any pullbacks related to short-term noise as an opportunity to add exposure to Restaurant stocks,” analyst David Tarantino wrote in a note.

The brokerage's most recent survey indicated January comps were just above +2 percent, better than December's -0.5 percent and more in line with the levels seen in October-November (+2.0  -2.5 percent).

Despite expecting softer comps in February due to weather and tax refund delays, Tarantino expects the impact from tax refund issues to reverse in March, and anticipates underlying comps could strengthen as the industry begins to cycle some of the issues.

“We see potential for investor sentiment on the group to improve as comps stabilize and as the focus turns toward the potential positives associated with proposed tax reform,” Tarantino continued.

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Meanwhile, the analyst reiterated his Outperform ratings on Jack in the Box Inc. JACK, Starbucks Corporation SBUX, Panera Bread Co PNRA, Habit Restaurants Inc HABT, Buffalo Wild Wings BWLD, McDonald's Corporation MCD, Dunkin Brands Group Inc DNKN, Zoe's Kitchen Inc ZOES, and Wingstop Inc WING.

In addition, BJ's Restaurants, Inc. BJRI, Cheesecake Factory Inc CAKE, Texas Roadhouse Inc TXRH, Zoe's Kitchen and Jack in the Box will be reporting their quarterly results next week.

Based on industry-wide softness in December, Tarantino expects quarterly comps for BJ's Restaurants, Cheesecake, Texas Roadhouse, and Zoe's Kitchen could come in slightly below consensus estimates.

That said, the analyst said investors may overlook the potentially lower-than-expected comps if these companies provide a reassuring quarter-to-date trends and/or the 2017 outlook.

For Jack in the Box, Tarantino anticipates solid comps for the Jack in the Box brand to offset expected weakness for Qdoba.