From fast food to fine dining, restaurants play a vital societal role. But it’s not all sunshine and rainbows as they’re notoriously hard to run thanks to perishable ingredients, labor shortages, or volatile consumer spending. These factors have weighed on the industry over the past six months as its 3.7% return has fallen short of the S&P 500’s 11% gain.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three restaurant stocks we would avoid.
Bloomin' Brands (BLMN)
Market Cap: $937.5 million
Owner of the iconic Australian-themed Outback Steakhouse, Bloomin’ Brands (NASDAQ:BLMN) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.
Why Do We Pass on BLMN?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Projected sales for the next 12 months are flat and suggest demand will be subdued
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital on unfavorable terms if market conditions deteriorate
Bloomin' Brands is trading at $10.97 per share, or 12.2x forward P/E. To fully understand why you should be careful with BLMN, check out our full research report (it’s free).
The Cheesecake Factory (CAKE)
Market Cap: $5.33 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ:CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Is CAKE Not Exciting?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $107.21 per share, The Cheesecake Factory trades at 23.3x forward P/E. Dive into our free research report to see why there are better opportunities than CAKE.
Portillo's (PTLO)
Market Cap: $321.3 million
Begun as a Chicago hot dog stand in 1963, Portillo’s (NASDAQ:PTLO) is a casual restaurant chain that serves Chicago-style hot dogs and beef sandwiches as well as fries and shakes.
Why Is PTLO Risky?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Portillo’s stock price of $4.49 implies a valuation ratio of 19.5x forward P/E. Read our free research report to see why you should think twice about including PTLO in your portfolio.
Stocks We Like More
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