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Here are examples from a quartet of restaurants that reported recently on the right way, the wrong way and a better way to react to earnings.

The Right Way: Yum! Brands and Red Robin Gourmet Burgers

In October,

Yum! Brands

(YUM) - Get Yum! Brands, Inc. (YUM) Report

reported an excellent quarter, significantly beating analysts' consensus estimates with earnings of 83 cents and raising guidance. The future of this company is overseas, especially in China.

The immediate reaction to Yum's results -- an 8% pop the next day -- was correct. The stock has held that level from that day forward. Traders, investors and analysts processed and reacted to the company's quarterly results and guidance the right way.

Yum! Brands

Source: CTS Trend

The right way can also be bearish. Take a look at what happened just last week to

Red Robin Gourmet Burgers

(RRGB) - Get Red Robin Gourmet Burgers, Inc. Report

. Excluding acquisition-related costs of 6 cents, EPS for the third quarter was 42 cents, vs. previous guidance of 40 cents to 44 cents and consensus estimates of 43 cents. Total revenue was $148.6 million, on line with guidance for $147 million to $149 million and consensus estimates of $148.39 million.

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That was OK. It was the fourth-quarter guidance that sent the stock down nearly $11, or 24%, after hours. Red Robin now expects total revenue for the fourth quarter to be between $156 million and $158 million and net income of 33 cents to 38 cents per diluted share. Included in that is 1 cent for acquisition-related charges, so the effective guidance is between 34 cents and 39 cents. Analysts' consensus then called for EPS of 49 cents on revenue of $163.49 million.

It appears that management is taking a more "conservative" approach to restaurant growth as it reins in new restaurant construction costs to improve shareholder returns. This is not what you want to hear from a restaurant concept in the early stages of nationwide expansion. What a disappointment from a once promising company!

Selling this stock was the right thing to do, and Red Robin failed (for good reason) to rally with the overall restaurant group over the next few trading sessions -- especially as the news of a management-led buyout of

OSI Restaurant Partners

( OSI) was announced Monday morning.

Red Robin Gourmet Burgers

Source: CTS Trend

The Wrong Way: Ruth's Chris Steak House

Ruth's Chris Steak House

(RUTH) - Get Ruth's Hospitality Group, Inc. Report

closed at $19.77 just before the company reported results after hours last week. The stock traded down the next two days to an intraday low of $17.89. The problem is that investors were only paying attention to the headlines -- they didn't read the press release, listen to the earnings call or understand the company. When I


the earnings call for

Street Insight

, I wrapped up my analysis as follows:

"The key behind the softer quarter was the lack of new company openings and the surge in beef prices. None of this was a surprise. What was a surprise to me, and a pleasant one at that, was that RUTH reiterated previous FY06 EPS guidance. The story gets better as we look toward a strong 4q06 and 20% or more growth in 2007. RUTH deserves a premium multiple and I think that it will garner one if beef prices continue to remain at or below current levels. I think that RUTH deserves a 25 earnings price multiple and am setting my 2007 price target at $26 per share."

On Tuesday, it closed at $19.89, above the price that the stock went at before the earnings hit. Clearly, this was the wrong way to react.

Ruth's Chris Steak House

Source: CTS Trend

A Better Way: McDonald's


(MCD) - Get McDonald's Corporation (MCD) Report

telegraphed its quarterly results and revised guidance when it reported September a few business days prior to the quarterly earnings release and conference call. That gave a nice bump to the stock. By the time the quarter was released, as we say in the business, the news was already in the stock. No surprises from the company. No possibility for the quarter to be misinterpreted. The markets performed according to the

efficient markets hypothesis

, which many of my academic colleagues at

Seton Hall University

and throughout academia espouse.

That is not to say that the stock is not a buy at these levels; it is. Along with YUM and


(SBUX) - Get Starbucks Corporation Report

, McDonald's is an excellent China play. My price target for 2007 is in a range of $47 to $52. Note that McDonald's pays its dividend once a year. This year's $1.00 per-share dividend goes ex-dividend on Nov. 13.


Source: CTS Trend

At the time of publication, Rothbort was long Yum, Ruth's Chris and McDonald's, although positions can change at any time. Rothbort has 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities. Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University. For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at Scott appreciates your feedback; click here to send him an email.