Raymond James Is Hungry For Cheesecake Factory And Chili's

Investors looking to take a more "constructive tactical stance" on the restaurant sector may want to consider Cheesecake Factory Inc CAKE or Brinker International, Inc. EAT, according to Raymond James.

The Analyst

Raymond James' Brian Vaccaro upgraded Cheesecake Factory from Market Perform to Outperform with a new $50 price target.

Vaccaro also upgraded Brinker from Market Perform to Outperform with a new $53 price target.

The Thesis

The restaurant sector is looking more encouraging for three key reasons, Vaccaro wrote in a note.

Restaurant industry data for December has yet to be released. As a whole, though, the restaurant sector could show a comp gain of 1.5 percent to 2 percent in the final quarter of 2018. This would imply sequential improvements in two-year comp trends. Encouragingly, expectations for a strong quarter isn't reflected in the Street's estimates, which calls for mostly flat to 0.5 percent comp growth.

The sector benefited from low gas prices and favorable macro trends and could continue into 2019 from a tax refund season, the analyst said. The group faces easy comparisons in the first two months of the new year.

Most restaurant chains will likely see mid-to-single digit wage inflation in 2019 due to a very tight labor market while more than 20 states increased their minimum wage for 2019. But most restaurants are expected to increase their menu prices by around 2 percent in 2019, which creates a scenario for flat to down slightly cost of goods sold ratios for most restaurant companies.

The research firm was already bullish on several names in the restaurant sector. The addition of Cheesecake Factory and Brinker, the parent company of Chili's and other brands, can now be made due to a ahead of a more favorable near-term setup for the group.

Price Action

Shares of Cheesecake Factory were trading higher by more than 5 percent Tuesday, while Brinker was higher by more than 4 percent.

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