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TheStreet Open House

Bankruptcy Watch: 20 Riskiest Restaurant Stocks

NEW YORK ( TheStreet) -- With the economy still very much in recovery mode and the jobs market stubbornly weak, consumers continue to be choosy about how they spend their limited discretionary funds. For the restaurant industry that means the competition is stiffer than ever, and some dining establishments are bound to go bust.

While a number of food chains such as McDonald's (MCD), Chipotle Mexican Grill (CMG) and Tim Hortons (THI) have reported growth in same-store sales, also known as comps, a key industry metric that tracks sales at well-established stores, the sector as a whole continues to face environmental pressure.

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Several restaurant bankruptcies have topped headlines the last few years. Notable among them: Metromedia Restaurant Group, which filed for bankruptcy in Oct. 2008, shutting hundreds of Bennigan's, Steak and Ale, and Ponderosa Steakhouse locations; Vicorp Restaurants filed for Chapter 11 in April 2008, closing dozens of Village Inn and Bakers Square restaurants; and Pecus ARG Holding, the parent of the Black Angus Steakhouse chain, filed for Chapter 11 bankruptcy in Jan. 2009.

There were 579,416 restaurants open across the country this spring, 5,204 less than at the same time last year, the NPD Group said. Americans spent less dining out and cut their restaurant visits by 3% this year, the first decline in spending since NPD began tracking the data in 1976. And restaurant visits are forecast to grow less than 1% per year for the next 10 years.

"Forecasts are something to be worked against, and are not cast in stone," Bonnie Riggs, NPD's restaurant industry analyst, told TheStreet. She said that certain restaurant segments such as family-style dining were declining even before the recession, struggling to stay relevant. Mid-tier locations get squeezed the most because consumers tend to either trade up or trade down based on their financial situation, she added.

One way to test if a company runs the risk of filing for bankruptcy is through the Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968. The Altman Z-Score measures several aspects of a company's financial health to forecast the probability of it going bankrupt within two years. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior to the filing, according to Investopedia.

On a general basis, companies with a Z-Score higher than 3 are considered safe with little danger of bankruptcy, while those with a score of 1.81 or lower are considered distressed, and are more likely to go bankrupt. Anything in between is a grey area.

While the formula, of course, isn't the only indicator of financial health -- and is by no means a guaranteed barometer of a company's bankruptcy risk -- it is a metric worth considering for those restaurants who fall below the safety zone. Those whose Z-Score is declining year-over-year may also raise a red flag.

Taking this into account, we offer the restaurant chains with a Z-Score below 3 for the trailing twelve months, according to data from I-Metrix, from the least risky to the most risky, with a little detail on what each company has been up to lately. We limited the list to companies with a stock price of at least $1.

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