This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Bankruptcy Watch: 14 Risky Restaurant Stocks

(Bankruptcy Watch: 14 Risky Restaurant Stocks report updated with Sonic's quarterly earnings results.)
NEW YORK ( TheStreet) -- Amid concern over a possible double-dip recession -- or at least some stall in the recovery -- in the midst of rising gasoline and food prices, bankruptcy is a real concern for any company, and the restaurant sector is certainly not immune.

American diners spent 40.5% of their food budgets eating away from home in 2010, down just slightly from 41% in 2006, according to data from the Bureau of Economic Analysis.

Chains such as McDonald's (MCD), Chipotle Mexican Grill (CMG) and Starbucks (SBUX) continue to grow. But even so, a number of restaurant operators have filed for Chapter 11 bankruptcy protection in recent months.


Notably, Sbarro, the famously mediocre Italian chain, went bankrupt in April. The Perkins and Marie Callender's restaurant chains filed for bankruptcy in early June, with plans to close 65 of their 600 locations and cut 2,500 jobs. Even celebrity-backed restaurants have fallen: Eva Longoria's Las Vegas restaurant Beso filed for bankruptcy in January, and Michael Jordan's The Steakhouse NYC, which overlooks the renowned lobby of the Grand Central Terminal, went under in November of last year.

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 -- including working capital, total assets, total liabilities, market capitalization, sales, retained earnings and earnings before interest & taxes (EBIT) -- 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 that fall below the safety zone. Those with a declining Z-Score 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 12 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 our analysis to companies with a market capitalization of at least $100 million, but you can click through to the last slide for a complete chart of the 20 Riskiest Restaurant Stocks.

NEXT...

1 of 16

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
DENN $10.43 0.00%
DPZ $108.66 0.00%
RRGB $83.39 0.00%
RUTH $14.73 0.00%
RT $6.24 0.00%

Markets

DOW 18,010.68 -115.44 -0.64%
S&P 500 2,107.39 -13.40 -0.63%
NASDAQ 5,070.0260 -27.95 -0.55%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs