Barclays Remains Neutral On US Restaurants Into Earnings

• US restaurant stocks were highly through 3Q15 and are down mid-single digits, in-line with the S&P.
• Barclays’ Jeffrey A. Bernstein maintained a Neutral rating on the restaurant segment.
• The segment’s 13 percent EPS growth estimate for 3Q15 seems achievable, Bernstein mentioned.

Analyst Jeffrey Bernstein mentioned that the US restaurant sector experienced significant volatility in 3Q15, leaving investors confused. He added that the sector was down “mid-single-digits in 3Q15, in-line with the S&P (not unlike 2Q15), relative to outperformance in both 4Q14 & 1Q15.”

While shares of Shake Shack Inc SHAK are down 9 percent year-to-date, despite rising to a high of $92.86 on May 22, Starbucks Corporation SBUX shares have been on an uptrend in 2015, gaining 43 percent year-to-date. Bernstein has Equal-weight ratings on both Shake Shack and Starbucks, with price targets of $44 and $54, respectively.

Shares of Cheesecake Factory Inc CAKE are down 13 percent year-to-date, while Wingstop Inc WING shares have lost 12 percent. Barclays has Equal-weight ratings on both Cheesecake and Wingstop, with price targets of $57 and $26, respectively.

Bernstein believes that a rebound is unlikely in restaurant stocks in the near future due to increasingly difficult US comps. Labor cost pressures are expected to more than offset the benefit from easing food costs, limiting the pricing power of various restaurant companies.

Shares of companies in the more defensive franchised QSR segment are highly valued and the ones with high leverage are less attractive in an environment when rates are expected to rise, the Barclays report stated, adding that concerns over a global consumer recession in the future also remain.

Bernstein believes that the 3Q15 industry consensus for a near 13 percent EPS growth is achievable. He added that this growth is similar to 2Q15, while representing a declining from the 20 percent recorded in 1Q15, which benefited from outsized comp growth.

The 2015 guidance, provided in late-2014, is likely to be reiterated or tightened by most of the players in the segment.

In the report Barclays noted, “…based on fundamental concerns ahead, expect initial ’16 guidance to prudently temper expectations. A key pushback remains valuation. Absolute multiples heave eased, though still aggressive vs. historic, leading to a focus on relative positioning.”