Report Card: Joe Buckley

Joe Buckley Bear Stearns
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2nd Place Restaurants

Bio

B.A., M.B.A., New York University. Buckley joined Bear Stearns as an analyst in 1985, and he has focused on the restaurant industry since 1987. Prior to joining Bear Stearns, he held analyst positions at Smith Barney, Raymond James and Standard & Poor's.

Industry Outlook and Style

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Something unusual has occurred in the restaurant industry that will cause its earnings to outperform the S&P 500 this year, Buckley says.

Ordinarily, after a string of profitable years for the industry, investors pour increasing amounts of capital into the leading restaurant operators so that they can build new units to keep up with growing consumer demand. But this time around, says Buckley, "unit expansion has remained controlled and modest," in part because the technology sectors were attracting so much of Wall Street's capital. Thus, even though the rate at which consumers eat out may slow in the softening economy, demand should still outpace supply, he reasons.

As a result, restaurants' relative earnings growth should be healthy in 2001, he believes. "Corporate earnings growth overall is expected to be up by 4% to 7% this year," Buckley says. By comparison, he says "numerous restaurant companies can grow earnings per share at solid double-digit rates. So while earnings growth probably won't be as strong as in 2000 or 1999, on a relative basis they'll stand out more, and that should be a positive from a valuation perspective."

Buckley thinks casual-dining restaurant Applebee's (APPB Quote) offers the most bang for the investor's buck. "The stock is selling at a much lower valuation than its peers," he notes. "Its multiple is 12 times our 2001 estimates, whereas Brinker and Ruby are selling at roughly 18 to 20 times -- and that makes sense, because they have had more consistent sales growth than Applebee's has. But we're saying Applebee's is cheap against those head-on competitors." He forecasts 2001 earnings-per-share growth for Applebee's of 15%.

Running a close second among Buckley's list of favorite stocks is Darden (DRI Quote), a casual-dining competitor of Applebee's. Darden owns the Red Lobster and Olive Garden restaurant chains. Selling at 13.5 times projected 2001 calendar-year earnings of $1.70, Darden "represents good value, because EPS can grow between 15% and 20%," he says. (Though Darden is on a May fiscal year, Buckley has projected the calendar-year earnings per share from his $1.57 EPS estimate for 2001 and $1.82 EPS estimate for 2002. Those figures are up 20% and 16%, respectively, from the previous fiscal year.) The stock can reach $30 or $31 in 12 months, Buckley says.

Additionally, he thinks Darden's sales will show "nice year-over-year increases." Not only will same-store sales continue to do well, growing 3% to 5% thanks to remodeling programs at Red Lobster and Olive Garden, but this fiscal year will be the first in the past four or five that Darden will open more restaurants than it closes, Buckley says. Net unit expansion will be as much as 2%, he adds.

A fast-food company is Buckley's third buy idea. Wendy's (WEN Quote), in his view, has done "the best job with its menu of any fast-food chain. It has diversified to include chicken and salad products, thus carving out a quality position within the industry."

Buckley says the arrival of a new senior management team -- CEO Jack Schuessler in March 2000 and CFO Kerrii Anderson in September -- has resulted in a new focus on shareholder value. "Wendy's has already performed very well at the restaurant level, and we're saying it now has the potential to perform more strongly from an overall corporate perspective," he says. "They can deliver more consistent EPS growth -- $1.72 in 2001 and $1.94 in 2002, up from $1.53 in 2000 -- and that in turn will improve valuation."

The stock was recently trading in the low $20s -- 14 times Buckley's 2001 estimate. He thinks it should be a $30 stock, which would make the multiple 17 times or 18 times. By way of comparison, McDonald's(MCD Quote) has a multiple of 20 times, which is justified by its bigger market cap and global reach, he says. (Bear Stearns has done no investment banking for the three stocks recommended in this story.)

Stock Pick

Favorite stock for next 12 months:
Applebee's

Comment:
"Applebee's offers investors a combination of the growth potential of the casual-dining segment and the defensive business model of the fast-food segment. Why? Because unlike its peers, it's heavily franchised. Only 20% of its units are company operated. Darden, by contrast, is 100% company operated, and Brinker and Ruby Tuesday are about 70% company operated. Franchising makes earnings more defensive. In good times, it's better to be mostly company operated, but in shaky times, it's preferable to be franchised. Applebee's will have easy comparisons this year because last year's same-store sales were poor. We're estimating 15% growth in EPS, from $2.40 in 2000 to $2.76 in 2001." Twelve-month target price: $47.


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Which stock do you like best? Oakes: Outback Steakhouse Buckley: Applebee's