Goldman analyst Michael Kelter says restaurant stocks will outperform in 2012, with quick-service restaurants (QSR) preferred over casual dining spots. He argues that lower food costs will likely lead to wider margins by the second half of the year. Kelter also argues that high-multiple growth stocks will outperform value stocks in the QSR group.
For that reason, Kelter added Chipotle Mexican Grill, a high flier with a forward price-to-earnings ratio of nearly 40, to Goldman's prestigious conviction buy list. Kelter says he expects earnings to grow by 35% to 40% this year, noting that his estimate for earnings of $9.39 a share is well ahead of the consensus estimate of $8.63 a share."We expect upside to both [same-store sales] and profit margins, as lower food costs work their way through the P&L and fixed cost leverage continues," Kelter writes. He also raised his price target for Chipotle by 5% to $410. Shares of Chipotle currently trade around $341 after rallying 60% over the past year. Meanwhile, Kelter also recommends McDonald's (MCD), Darden Restaurants (DRI) and Tim Hortons (THI) as other favorite long ideas in the sector for 2012, while he would sell Cheesecake Factory (CAKE), Yum! Brands (YUM) and Wendy's (WEN). He rates Dunkin Brands (DNKN) as "neutral." Meanwhile, Goldman analyst Michelle Tan added yoga-wear maker Lululemon to the firm's conviction-buy list, arguing that the company's continuing momentum and some of the recent controversy of Lululemon's higher inventory is a source of opportunity. Tan has a $64 six-month price target on Lululemon, which trades at $47.03 after dropping nearly 20% over the past six months. "We believe LULU still offers one of the most compelling growth stories in retail, with continuing brand momentum," Tan writes Wednesday, pointing to the company's strong year-over-year growth in Google trends this holiday season. Tan also notes that Lululemon has sector-leading annual sales growth of over 30% and that a "substantial runway" still lies ahead. After investors have grown worried over Lululemon's building inventory levels, Tan says Lululemon should have normalizing inventories, which will help drive sales in 2012. "We believe consensus margin expectations already more than capture the impact of inventory normalization," Tan writes. "Even if cost pressures and normalizing markdown rates reverse all the product margin gains LULU has seen since 2008, a detailed breakdown of drivers suggests fixed cost leverage is an offset that is underappreciated in consensus margins." -- Written by Robert Holmes in Boston.
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