CHICAGO, May 26, 2011 /PRNewswire/ -- Stocks featured in
this week's Zacks Industry Rank analysis include McDonald
(MCD), Morton (MRT), Buffalo Wild Wings (Nasdaq:
BWLD) and O'Charleys (Nasdaq: CHUX).
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Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist,
Zacks.com.
Restaurants Looking Tasty
Sometimes the most interesting results from the Zacks Industry
Rank come when things seem counter to what one might expect given
the overall macro picture. One would think that with unemployment
still very high, and prices at the pump taking a big bite out of
consumer's wallets, that people would be cutting back on going out
to eat. Also, food prices have been headed up, and that presents a
potential margin squeeze.
However, the Restaurant Industry is doing very well based on
earnings surprises and subsequent upward estimate revisions. Those
are, of course, the main factors that drive the Zacks Rank. The
industry currently comes in at number 39 on the list, an
improvement of 16 spots from last week. The strong results from
this group, one of the most discretionary of industries, suggest to
me that consumers are getting more confident than is generally
realized.
Zacks Industry Classifications
The Zacks industry classifications are very fine, with 256
different industries tracked. It is not particularly noteworthy if
a single small industry shows up doing well, a single firm with
good news can propel a one or two firm industry to the top (or
bottom) of the charts. It is interesting when you see a cluster of
similar industries at the top of the list. The same holds true for
the bottom of the list. The definition of size that matters here is
not the total sales or market capitalization but the number of
companies in the "industry."
Good Eats!
The Restaurant industry is a large one. It has 44 firms in it,
and many of these firms are huge, household names, and often even
relatively small firms by market capitalization are well known. A
large number of firms makes it much less likely that the industry
will end up on the top (or bottom, for that matter) of the charts.
While 39th spot on the list would not be particularly noteworthy if
the industry had only six or seven firms in it, it is significant
when the industry has 44 firms in it.
What is interesting is that the restaurants that are doing well
cut across the price spectrum. McDonald's (MCD) and
Morton's (MRT) are both restaurants but have very different
price points, yet both hold Zacks #2 Ranks. McDonald's is a
worldwide operation, with most of its earnings and revenues coming
from overseas, while Morton's is far more domestically focused.
Mid-range restaurants such as Buffalo Wild Wings (Nasdaq:
BWLD) and O'Charleys (Nasdaq: CHUX) are also strong based on
the Zacks Rank.
The valuations, particularly based on this year's earnings, are
not particularly compelling. They become more reasonable, but not
exactly cheap, if you are willing to look out to next year's
earnings. Small successful restaurant chains often have excellent
growth prospects, since the formula can be replicated over and over
in new locations. However, they also have a tendency to flame
out.
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Contact: Dirk Van Dijk, CFA
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