Deutsche Bank is looking for a short-term rally in restaurant stocks, despite a litany of issues overhanging the sector. Why? Because they think all that horrible news is already in the stocks.
First, the (obvious) negative factors affecting restaurant consumers:
- $4-$5/gallon gasoline
- $7/bushel corn
- falling consumer confidence
- rising unemployment
But, says DB, all these concerns (and then some) are already factored into the stocks:
Sector valuations are back at the lows reached in Jan ’08, which marked a bottom for the group. The industry now trades at 14.3x forward‐yr EPS, near an all‐time low, with casual dining stocks at 12.5x. However, unlike Dec/Jan, we have seen few earnings pre‐announcements this quarter, with arguably more good news than bad. Management teams seem comfortable with ’08 guidance for now, and rebate checks are likely to provide a temporary shot in the arm for consumer traffic. As such, we are more constructive on the sector.
Deutsche’s Top Pick continues to be McDonald’s (MCD), as they see estimates moving higher and an attractive cash flow:
We have raised our 2QE by 3c, to $0.87, putting us 2c ahead of consensus. We still view our 2Q/2008 model as conservative on both sales and margins. Rising ROIC and a 5% free cash flow yield provide downside support. We also expect another significant dividend increase this fall.
Add a rebate check bounce to those sentiments and we may have a winner. Meet Wal-Mart’s (WMT) recession-resistant peer.
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