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After huge run-up, will burger stocks stumble in 2014?

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Cronut burger ramen burger
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Cronut burger and ramen burger OK, so we guess that technically, the cronut burger and the ramen burger aren’t actually celebrities. But they may as well have been, considering how infatuated everyone seemed to be with them in 2013. Some people swore they were delicious, others criticized them for being incredibly unhealthy – regardless, we all knew someone who was talking about them. Of course, there was that unfortunate incident of food poisoning at the cronut burger tent at the Toronto Exhibition, but hey, everything comes with a price, right?

If you were into burger and steak sellers in 2013, chances are you're showing quite a gain these days. Not in your waistline in your stock portfolio.

Restaurants known best for beef surpassed the market and the dining-out industry overall in the past year, climbing more than 60%. What's perhaps most interesting is the big year in burgers unfolded even as we continue to eat less beef.

Yes, beef consumption in America, 79.2 lbs. a person in 1985, is steadily declining. This year it's likely to be 56.5 lbs. Amid this shift, influenced partly by cheaper alternatives and white-meat-is-better-for-you campaigning, "burger" stocks are relying more on non-beef. McDonald's (MCD) has made its recent publicity pushes with items including egg whites, wings and chicken wraps, and it actually ended the Angus line. Burger King (BKW) offered turkey burgers and lower-calorie fries. Wendy's (WEN) sold chicken on flatbreads and, even when it was about the beef, it was really about the buns.

The question now is whether what went right for these stocks in 2013 will repeat in 2014. That seems like a significant stretch, owing to the magnitude of the run-up and how unusual it was compared with ordinary trading ranges for the shares. That doesn't necessarily mean they'll fall, only that another incredible outpeformance will be difficult to muster.

If the meat shops are to stay super hot, a few things must occur.

Hunger games

Big, institutional investors move markets. Money managers have gobbled up companies showing room for growth, as simply matching the market isn't good enough. When restaurant names can expand locations, and revenue by extension, it's coveted. Will the heavy hitters favor restaurants again in 2014? The S&P 500 rose 29% in 2013, while consumer discretionary stocks, measured by the Consumer Discretionary Select Sector SPDR (XLY), gained 39.7%. The 37 restaurants we track rose 56.4%, with only three decreasing. Beef-focused venues did even better.

If you owned shares in McDonald's, Red Robin (RRGB), Sonic (SONC), Wendy's, Jack in the Box (JACK), Burger King and Carrols (TAST), a large Burger King franchisee, you'd be up 62.1%. Ruth's Chris operator Ruth's Hospitality (RUTH), Steak 'n Shake owner Biglari Holdings (BH), Del Frisco's (DFRG), Outback Steakhouse parent Bloomin' Brands (BLMN) and Texas Roadhouse (TXRH) combined for a 63.5% rally.

[Related: Restaurant stock of the year: Wendy's]

As companies such as Wendy's and Burger King franchise more locations, investors have applauded gaining greater visibility into a revenue stream reliant on franchise fees vs. corporate-owned store sales. Across the beef-restaurant spectrum, profits are set to soar year-over-year, which, as has been the case with many equities post-financial crisis, aided in elevating share prices, even without much top-line change.

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The Fleur Burger 5000 is shown in the Fleur Restaurant at the Mandalay Bay Resort in Las Vegas, Nevada December …

McDonald's, the largest of the group, didn't do much relatively speaking. It got a 10% gain, and, although that's on par with its normal appreciation, it probably says more about the levitating effect of the market than anything. While it does bring in astonishing revenue, same-store sales have been horribly uneven. McDonald's year was mostly memorable for healthier living initiatives, offset by negative commentary surrounding low wages and questionable advice for employees.

Top this

Nonstop news factored in, and hype will have to play at least some role if the burger-stock boom is to continue. Since the economy remains iffy for many people, restaurants need to work ever harder to get you in the door.

Menu changes are a start. We got the Pretzel Bacon Cheeseburger at Wendy's. We got pricier premium burgers at Red Robin. Better burgers are in vogue, as the likes of In-N-Out and Smashburger raise the quality bar. Others got involved, including Darden Restaurants' (DRI) Olive Garden, which added burgers to its Italian-fare menu.

More broadly, conversations around eating were constant. We had the Cronut craze. Chipotle's (CMG) "Scarecrow" video went viral. Ramen noodles became buns. We saw IPOs such as Noodles & Company (NDLS) and Potbelly (PBPB). Even when it was bad news, food was big news: Are sodas too gigantic? Is industry pay too low?

Below any article about a publicly traded restaurant you'll find snarky comments asking how much money the company paid for the ad. Not entirely fair. But it's also not entirely fair for the media to completely discount the effect our writing about food stocks can have. When this article mentions "Wendy's," you at least think about "Wendy's." Coverage surrounding every new bun, sauce and calorie count has reached deafening levels in the online press and social media.

How creative will restaurants be in the year ahead and, in this short-attention-span world, will we care?

Pricing projections

In the past five years, for which nine of our 12 beef-heavy companies have complete track records, the average annual gain is 14.1%, less than one-quarter of the 2013 advance. It's tempting to anticipate a coming slowdown, especially given elevated forward price-to-earnings ratios and other above-average valuation metrics.

Eating out isn't going away, but how much more will consumers spend at restaurants? In 1970, 25.9% of our food expenses were outside the home, while in 2012, it was 43.1%. The U.S. has roughly 980,000 restaurants, where sales this year are expected to be $660.5 billion. Beef prices will probably rise in 2014 and "remain generally strong-to-higher over the next few years," the USDA forecasts.

There are wild cards, such as the possibility a drought quickly drives up feed prices and, in turn, those for cattle. Even in a normal year with ordinary inflation, restaurants must keep expenses favorable. For 2013 profit margin measures are set to show decent expansion. Ideally for the companies, we'll pay more for the same amount of food next year. Some higher-end chains, like Outback, have had more success here than the low end, where McDonald's dwells. Alternately, they could cut portion sizes to charge the same for less, as Buffalo Wild Wings (BWLD) effectively has done. Or they can ply us with other proteins, namely chicken or pork, that aren't as costly and address beef's lower popularity.

In November the Labor Department said overall food prices rose 1.2% from the same month in 2012. Costs for food eaten at home were up 0.6%, but for food bought at outside locations, prices increased 2.1%. How much higher will we be willing to go in the coming year?

Restaurants, like any stocks, can get too hot to keep purchasing. Given the past year, if we're not there already, we may be close.

 

 

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