This is a special look at two of the picks in Chris Versace’s Reopening Portfolio appearing today on Real Money. See the full list of his picks and watch Chris and his fellow Real Money columnists Stephen “Sarge” Guilfoyle and Ed Ponsi debate their choices on May 26 in a special Real Money webinar, Real Talk. Sign up now!
Over the last several quarters, the consumer appetite for spending on several fronts, such as dining out, new clothes, makeup and other personal care products and gym memberships, has been hampered by the pandemic. But with vaccine levels rising, restrictions easing, employment improving and some consumers flush with stimulus checks, a number of sectors are poised to rebound.
Findings from consulting firm McKinsey suggest that more than 50% of U.S. consumers expect to spend extra by splurging or treating themselves, with higher-income millennials intending to spend the most. Nearly half are “pandemic-fatigued” and intend to spend on discretionary categories such as apparel, beauty and electronics. Others plan to splurge mainly on experiential categories such as restaurants and travel.
Against that backdrop, the shares of Darden Restaurants (DRI) - Get Darden Restaurants, Inc. Report and Cedar Fair (FUN) - Get Cedar Fair, L.P. Report are two companies whose shares should prosper in the coming quarters as consumers open their wallets and spend as they couldn’t during the pandemic.
The portfolio of restaurants under Darden’s umbrella runs the gamut from Olive Garden and Longhorn Steakhouse to Season 52 and The Capital Grille, which position it to appeal to most consumers as they look to once again dine out. During the pandemic, the company has streamlined its operations, which bodes well for margin improvement as dining volumes start to climb. That combination should drive healthy revenue and EPS growth in the second half of the year vs. the first half, as well as in the first half of 2022. Currently, consensus expectations call for EPS of $5.75 in 2021, up significantly compared to $1.98 in 2020 and $2.10 in 2019.
In addition to the rebound in business that should drive PE multiple expansion on rising earnings, thereby moving DRI shares higher, Darden is one of the few companies that recently reinstated its quarterly dividend back to pre-pandemic levels -- in Darden’s case, this was $0.88 per share. At the current share price, that equates to a yield of 2.6% compared to 1.4% for the the S&P 500 as a whole. Alongside that dividend return, Darden shared that it would return to its dividend payout target of 50%- 60% of future earnings, which means investors can expect an even higher dividend to emerge in the coming quarters.
Turning to regional amusement park operator Cedar Fair and its 13 properties that span amusement parks, water parks and complementary resort facilities, it’s no secret the pandemic’s restrictions were a body blow to the company. Its 2020 revenue fell to $182 million compared to $1.5 billion the year before, and the absence of revenue led the company’s history of positive EPS to get derailed last year. The company reported another bottom line loss for the March quarter, the direct result of a 936,000-visit decrease in attendance and COVID-19-related park closures.
With the easing of pandemic restrictions, Cedar Fair’s parks are poised to open in the coming weeks and the company shared that it is already seeing a lift in season pass sales. That’s in addition to the more than 1.8 million active season passes already on the books and valid through the 2021 season. The bottom line is more people attending the park year-over-year will drive revenue, cash flow and put Cedar Fair on the path to returning to EPS generation. The next step forward will be if it reinstates its dividend -- the last one of $0.935 per share was paid in March 2020.
Chris Versace is a regular contributor to Real Money and co-portfolio manager of TheStreet’s Trifecta Stocks and Stocks Under $10. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Mark Sebastian, Paul Price, Doug Kass and others.
Disclosure: At the time of publication of this article, Versace held no positions in any of the stocks mentioned in this article.