Web Exclusive | January 2012 | By Barney Wolf

Fast Casual, Pizza Fuel Stocks

Quick-serve stocks beat rest of restaurant industry in 2011.

Buoyed by improved earnings and international growth, the quick-serve industry as a whole saw its stock values handily beat the overall market in 2011 and perform much better than the rest of the restaurant industry.

The S&P 500’s restaurant sub-index, consisting of the five restaurant stocks in the S&P 500, jumped 29.9 percent in 2011. The sub-index tracks quick-serve companies Chipotle Mexican Grill Inc., McDonald’s Corp., Starbucks Corp., and Yum! Brands Inc., as well as one full-service company, Darden Restaurants Inc.—the group’s only company to drop in price last year.

Additionally, McDonald’s and Yum are among nine stocks making up the Bloomberg U.S. Quick-Service Restaurant Index, which gained 13.5 percent. Bloomberg’s 17-stock full-service restaurant index, meanwhile, dipped 1 percent.

The numbers reflect broader economic trends, says Jim Yin, industry analyst at New York S&P Capital IQ, a provider of data and analytics for financial professionals worldwide.

“The economy is still somewhat sluggish, and consumers remain cautious,” he says. People continue to eat out, but three-quarters of them are being judicious or even trading down in their dining choices, he says. “That helps fast food and hurts casual dining.”

R.J. Hottovy, restaurant industry analyst at Morningstar Inc., a Chicago-based investment research firm, says fast-casual stocks performed especially well last year and carry the most potential moving into the future.

“If you look at domestic consumer stories, there are really a limited number of true growth stories,” Hottovy says. “You’re seeing some of that in fast casual.”

Yin says fast-casual businesses are increasingly attracting consumers who are trading down from casual dining. Even diners who are looking to cut back “still like to go to places that have an upscale image and good quality,” he says.

The S&P 500's restaurant sub-index jumped 29.9 percent in 2011.

Fast casuals dot the top-performing stocks list, led by Chipotle (up 58.8 percent) and Carrols Restaurant Group Inc (55.9 percent)., owner of Pollo Tropical and Taco Cabana.

The pizza category also performed well in 2011, with shares in two very different pizza chains, Pizza Inn Holdings Inc. and Domino’s Pizza Inc., leading all quick serves. Pizza Inn’s stock nearly tripled (up 182.1 percent), while Domino’s (up 112.9 percent) more than doubled.

Pizza Inn, based in The Colony, Texas, has been stabilizing after many years of decline. It has about 300 open units, far from its peak of 775. The company’s earnings rose during fiscal 2011, and same-store sales were up each of the past three quarters. Pizza Inn also expanded its credit facility to finance new growth, and opened its first store in China.

What really captured investors’ attention, however, was the June opening of the company’s new fast-casual concept, Pie Five Pizza Co., in Fort Worth, Texas. It complements Pizza Inn’s existing buffet, delivery/carry-out, and express prototypes.

Pie Five gets its name from offering fresh pizzas in just five minutes. Guests choose their toppings as they move down an ordering line, and the company’s high-tech ovens bake the nine-inch pies in two minutes.

The first Pie Five store recorded $230,000 in sales and $50,000 in operating income, before taxes, during the most recent quarter. Three more units also opened.

“Our first store has been a great success,” says Pizza Inn president and CEO Charlie Morrison. “We made a commitment to have eight to nine stores open by June of this year, and we’re confident we’re going to meet that goal.”

Domino’s, the world’s second-largest pizza chain with 9,400 units, benefited from its value-priced pies and revamped recipes. It also added a line of artisan pizzas and continues to expand rapidly, particularly overseas, where sales growth is strong.

During the third quarter of 2011, earnings jumped 33 percent over the same period a year earlier.

“We think the international segment, which accounts for about 35 percent of [earnings before interest and taxes] will continue to drive revenue gains and new unit openings,” Yin says of Domino’s. The company should grow a net 250–300 stores this year, he says.

The best traditional quick-serve stock performer was the biggest one, McDonald’s. Its stock rose 30.7 percent by “outperforming its peers,” Hottovy says. It continues to have great sales and profits, a good dividend, and a menu that appeals to both value and upscale diners.

Hottovy says a number of restaurant stocks that chalked up good gains last year exhibited growth or the potential for growth and provided their customers with good value. Many of them are also expanding internationally, particularly in China, he says.