Like many sectors in the S&P 500, the consumer discretionary, and especially the sub-sector of restaurants, had a nice run following the election as investors considered the favorable potential from the incoming Trump administration. With many seeing the positives for corporate and personal tax cuts, the natural response is to seek ideas in areas that benefit the most.
In a new research report, Jefferies concedes that the market is discounting the tax cut and lower regulation scenarios, but the firm also notes that near-term fundamentals for many of the top companies in the restaurant arena are difficult. The report notes that same-store-sales during the holiday season may prove to be challenging, citing the weather and the calendar.
With restaurant stocks finishing 2016 up 5% versus the S&P 500, the caution level remains high. However the company focuses on four top new money buys for 2017, and all are very well positioned in their arenas.
The retail giant has traded sideways for the most part since this time last year and could be poised to breakout. Starbucks Corp. (NASDAQ: SBUX) operates as a roaster, marketer and retailer of specialty coffee worldwide. Its stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single-serve and ready-to-drink coffee and tea products, juices and bottled water.
The company also licenses its trademarks through licensed stores, as well as grocery and national foodservice accounts. The company offers its products under the Starbucks, Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange, Ethos, Starbucks VIA, Starbucks Doubleshot, Starbucks Refreshers and Starbucks Discoveries Iced Café Favorites brand names.
The report noted this:
A rare play in the large cap space given solid visibility and growth opportunity. We expect ongoing investments to create a unique digital ecosystem for its rewards program to support continued strong same-store-sales (SSS), which along with favorable commodity costs, should offset currency and investments in growth. Near-term SSS likely more in +4% range in Americas, but EPS growth still expected to be 15%+ in ’17.
Starbucks shareholders are paid a 1.8% dividend. The Jefferies price objective for the stock is $65, and the Wall Street consensus target is $64.91. The stock closed on Wednesday at $55.99 per share.
For the better part of the past three years, this company was a top momentum stock. A recent sell-off offers a favorable entry point. Panera Bread Co. (NASDAQ: PNRA) is an upscale fast-casual chain with more than 2,000 stores in 45 states. Besides its fresh-baked bread, menu offerings include made-to-order sandwiches, salads and soups, pasta, flatbreads, as well breakfast items. Panera’s system is 55% franchised and 44% company-owned. The company has developed into an industry leader in driving digital sales that increase restaurant sales capacity.
The analyst commented in their research report:
Fundamentals appear to be improving, with visible same-store-sale drivers in place; however, questions about slower traffic trends in third quarter appear to be weighing on the stock recently (and the question of how best to measure frequency for a business model that has shifted so rapidly to digital orders & high-ticket delivery/catering/RPU channels). Although only modest EPS growth in ’16, and the potential magnitude of the EPS ramp in 2017 remains uncertain (guide is simply “double digit growth”), we think 15%+ growth is realistic and that investors should reevaluate the likelihood that EPS estimates are depressed.
Jefferies has a $245 price target for the stock, and the consensus target is posted at $234.05. The stock closed most recently at $207.39 a share.