10 Restaurant Stock Winners of 2010

(Restaurant stock winners of 2010 article updated with broker action on Chipotle.)
NEW YORK ( TheStreet) -- Stocks in the restaurant sector mostly moved higher in 2010, but even as the sector rode the overall market recovery a group of restaurateurs clearly stood out as the year's industry winners.

Affluent Americans returned to their spending ways in 2010 as consumer confidence worked to regain its footing, said Stifel Nicolaus analyst Steve West.

>>Restaurant Stocks: Earnings to Watch

The PowerShares Dynamic Leisure and Entertainment Portfolio ( PEJ), PowerShares Dynamic Consumer Discretionary Sector Portfolio ( PEZ) and PowerShares Dynamic Food & Beverage Portfolio ( PBJ), exchange-traded funds that count restaurant stocks as at least 10% of their portfolio, soared 37.4%, 27.9% and 27.6%, respectively, so far in 2010. By comparison, the S&P 500 rose just 8.2% in the same time period with the SPDR S&P 500 ( SPY) gaining 8.9%.

That trend boded particularly well for restaurants in what West calls the "upper-mid-scale-casual" segment in 2010. Restaurant chains like Chipotle Mexican Grill ( CMG), Panera Bread ( PNRA) and Cheesecake Factory ( CAKE) grew revenue by 19.7%, 13% and 3.4%, respectively, in the first three quarters of the calendar year. Fourth quarter sales are expected to show another 20.5% year-over-year bump at Chipotle, a 13.7% increase at Panera and 4.3% at Cheesecake Factory.

That's because those mid-level restaurant concepts cater to a broader base of consumers, West told TheStreet, as opposed to most fast food chains -- industry lingo calls them quick-service restaurants, or QSRs -- which appeal mainly to minorities and people in the 18- to 25-year-old range, demographics disproportionately affected by high unemployment .

"The Holiday season has a way of focusing the market's attention on the state of the U.S. consumer, and the development of consumer confidence and spending in 2011 will be a key driver of equity prices," said Nicholas Colas, ConvergEx Group chief market strategist.

Data released Nov. 30 showed that consumer confidence among Americans pushed up to its highest level in five months in November .

"Consumers' assessment of the current state of the economy and job market, while only slightly better than last month, suggests the economy is still expanding, albeit slowly," said Lynn Franco, director of The Conference Board consumer research center. "Expectations, the main driver of this month's increase in confidence, are now at the highest level since May. Hopefully, the improvement in consumers' mood will continue in the months ahead."

>> Consumer Confidence Gains in November

With all this in mind, here then is a rundown of 2010's best-performing restaurant stocks. We limited the list to companies with market caps of at least $500 million, ranked by share price percentage gains, from good to great.

(Data is based on closing prices on Dec. 1, 2010.)

Darden Restaurants

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Darden Restaurants ( DRI)

Year-to-Date Share Price Percentage Gain: 40.6%

Market Capitalization : $6.83 billion

Darden enjoyed solid share price percentage gains in 2010 , in part because it falls under West's umbrella category of "upper-mid-scale-casual" restaurants, a segment of the industry that focused more on customer service -- rather than deep discounting -- to get penny-pinched customers in the door this year.

That focus means Darden, along with industry peers like Texas Roadhouse ( TXRH) and Cracker Barrel Old Country Stores ( CBRL), is well-positioned coming out of the Recession, West said.

>>Darden Dips on Sales Miss

The operator of Capital Grille restaurant brands, among others, announced in October it inked a franchise deal with Kuwait Food Company Americana to set up international chain restaurants of its Red Lobster, Olive Garden and Long Horn Steak House brands in the Gulf Cooperation Council, Egypt, Jordan and Lebanon.

In September, Darden reaffirmed its fiscal 2011 guidance, saying it expects earnings per share to grow 14% to 17% year-over-year, or between $3.26 and $3.35 per share. Full year revenue is expected to grow in a range between 5.5% and 6.5%, to a range between $7.5 billion and $7.57 billion.

Looking ahead to 2011 and 2012, as food prices rise, pricing power will be all-important for restaurant sector players as the group works to manage and protect margins. Chains like those Darden runs that are already focusing on customer service are poised to fare well since they will have the strongest pricing power, West speculated.

Yum! Brands

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Yum! Brands ( YUM)

Year-to-Date Share Price Percentage Gain: 44.2%

Market Capitalization : $23.62 billion

Yum! had a stellar year, no thanks to the U.S. market. While QSR restaurant chains tended to fare worse this year as higher-than-average rates of unemployment plagued the fast food sector's core demographics, Yum! found success overseas.

"As goes China, so goes the Yum! stock," West said.

Yum!'s Pizza Hut brand rebounded this year, but its contribution to Yum!'s bottom line was fairly small. Taco Bell went positive in the recent quarter but improvements came mostly from strength in China.

A rebound of Chinese consumerism, following the country's fiscal stimulus program last year, helped operators like Yum! in 2010, West said.

>> Yum's Delicious Outlook: China Watch

Yum! said same-store sales -- or sales at stores open at least one year, a closely watched metric in the restaurant industry -- grew 6% in China and only 1% in the U.S. Stateside comps grew 8% at Pizza Hut and 3% at Taco Bell. Comps at KFC fell 8% .

"We continue to make progress at all three divisions and are especially pleased with the continued strong results from our China business," said CEO David Novak. "The combination of high-return, new-unit development, same-store-sales growth and increasing margins drove operating profit growth of 23% in China for the quarter."

West also pointed out that Yum! enjoyed 24% profit growth in China last quarter.

Acceleration in emerging markets like Russia, France and Vietnam, as well as more established European markets seems on track, he noted. Sales improvement in China should also continue to build.

Cheesecake Factory

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Cheesecake Factory ( CAKE)

Year-to-Date Share Price Percentage Gain: 49.1%

Market Capitalization : $1.91 billion

Cheesecake Factory had a strong showing this year. Its latest earnings report on Oct. 21 was better than expected as management cited "increasing momentum." Cheesecake also raised full-year guidance, driving the shares higher by 15%.

Cheesecake grew revenue by 3.4% in the first nine months of 2010 . Fourth-quarter sales are expected to grow 4.3% year-over-year.

Like other mid-level restaurant concepts, Cheesecake caters to a broader base of consumers, and focuses on customer service, helping to drive its healthy results in 2010.

The restaurant chain beat expectations for the recent quarter, primarily driven by comps growth of 2.8%. Earnings increased 35% to $22 million, or 37 cents per share. Revenue grew 4.4% to $418.4 million.

Sterne Agee analyst Lynne Collier maintained a neutral rating on Cheesecake following its report, but raised her earnings expectations for the company. Analysts from JPMorgan issued an upgrade on Cheesecake's stock to neutral from underweight, with a price target of $29.

Piper Jaffray maintained an underweight rating on the stock, but raised its earnings estimates and price target. The analysts set a price target of $25. "While we do not expect the fourth quarter of 2010 to be trending materially higher, we have tweaked up our same-store sales estimates in the fourth quarter of 2010 to account for improving restaurant-level sales," the firm noted.

Panera Bread

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Panera Bread ( PNRA)

Year-to-Date Share Price Percentage Gain: 52.2%

Market Capitalization : $3.09 billion

Panera, like Cheesecake and Chipotle, was among the mid-scale restaurant concepts that fared best this year, in part because of its focus on customer service, and also thanks to the return of affluent consumerism as Americans' confidence improved in 2010.

Panera grew revenue by 13% in the first three quarters of the calendar year. Fourth quarter sales are expected to show another 13.7% increase.

Recently Panera posted third-quarter earnings in line with expectations , but top-line sales of $372 million came in just shy of analysts' consensus call. Quarterly profits jumped 21.1% year-over-year.

Still, the sandwich and salad purveyor was optimistic. Panera raised its earnings guidance for the current quarter, saying it now expects to earn between $1.15 and $1.17 per share in the fourth quarter. That's as much as a nickel past Wall Street's expectations for fourth-quarter earnings of $1.13 per share.

"We're coming right through this recession as strong as ever," Executive Chairman Ronald M. Shaich told TheStreet.

Panera reported that system-wide comps grew 6.9% in the recent quarter, including a 5.5% increase at company-owned stores and a 7.9% increase at franchise-operated locations.

Texas Roadhouse

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Texas Roadhouse ( TXRH)

Year-to-Date Share Price Percentage Gain: 54.1%

Market Capitalization : $1.24 billion

Like competitors Cheesecake Factory and BJ's Restaurants ( BJRI) in the casual dining space, Texas Roadhouse did well in 2010 in part because of its focus on customer service, West said, and is therefore doing better-than-average as the economy lifts itself out of recession.

The Louisville, Ky.-based restaurateur posted an 8% jump in revenue in the recent quarter to $245.6 million. Net income jumped 30% to just under $14 million, or 19 cents per share.

Margins hitched a ride on traffic. The quarterly gross margin extended from 18% to 19% and the operating margin inched up from 7.6% to 8.7%. Economic trends suggest that Texas Roadhouse may still be growth-poised.

Quarterly comps grew 4.3% at company-operated restaurants and 4.4% at franchised locations.

Texas Roadhouse also said comps in the first four weeks of the current quarter grew 3.5% year-over-year. It forecast 2010 diluted earnings per share growth to be around 20% higher than in 2009, at the high-end of its previously announced outlook for growth in the 16% to 20% range.

The revised estimate was based on guidance for comps growth of 2% and 14 new restaurant openings in the year.

Texas Roadhouse has increased sales 12% annually, on average, since 2007 while boosting earnings per share 15% a year.

Domino's Pizza

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Domino's Pizza ( DPZ)

Year-to-Date Share Price Percentage Gain: 76.6%

Market Capitalization : $888.62 million

Domino's beat top- and bottom-line expectations for the third quarter , though net earnings actually declined year-over-year to $16.6 million, or 27 cents per share. Adjusted for one-time gains booked in the year-earlier period however, earnings did grow year-over-year.

A 14.8% jump in revenue was attributed to higher volumes and rising commodity prices. Domino's supplies ingredients to its franchisees, and passes higher commodity prices on to them, allowing the company to profit from higher commodity costs. The company also saw higher same-store sales in both domestic and international stores and store count growth in international markets.

Domino's shares were downgraded in April from buy to hold from Feltl analyst Mark Smith, citing the chain's valuation.

Domino's had its risks in recent years as customer perceptions of its food quality mounted, but its financial standing is improving.

Quarterly revenue jumped 14.8% to $347.4 million, besting expectations by nearly $12 million.

Comps grew 11.7% year-over-year, thanks to continued positive consumer response to the company's new pizza recipe, launched last December. Smith said he was encouraged by Domino's performance after the new recipe was launched, and was surprised the momentum maintained as well as it did. Domino's also benefited because so many people who tried the new pizza ordered online, giving the company an easy way to continue marketing to them through email reminders, promotions and coupons.

Ruby Tuesday

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Ruby Tuesday ( RT)

Year-to-Date Share Price Percentage Gain: 81.1%

Market Capitalization : $845.7 million

West cautioned that chains like Ruby Tuesday, which compete with DineEquity's ( DIN) Applebee's and Brinker International's ( EAT) Chili's in the bar-and-grill segment, have generally poor fundamentals coming out of the recent recession relative to other restaurants in the casual dining space.

While the segment is doing poorly, stocks were so depressed at the start of 2010 that significant share price percentage gains in the year were, in large part, a simple bounce off serious lows, West said.

The analyst did credit Ruby Tuesday's management with setting low enough expectations so investors didn't expect much. That way when it did beat profit expectations the stock popped.

Like others in the bar-and-grill segment, Ruby Tuesday focused heavily on "extreme discounting" in 2010 as a means of luring customers in the door. That worked well enough -- revenue in its recent fiscal quarter edged slightly higher and comps grew 1.2% -- but the drawback to that strategy is the training of its customer base to only buy when heavy promotions are offered.

That means customers will either wait to dine at Ruby Tuesday until there is a discount, or save up their money and trade up to chains like Cheesecake Factory, West said.

BJ's Restaurants

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

BJ's Restaurants ( BJRI)

Year-to-Date Share Price Percentage Gain: 98.3%

Market Capitalization : $1.02 billion

Casual dining chain BJ's said last month its third-quarter profits surged more than 70% , and revenue jumped 24%, as comps increased 6.7%.

Analysts from Oppenheimer recently downgraded the restaurateur's shares to perform, from outperform, maintaining a $30 price target. Also in late October RBC Capital reiterated a sector perform rating on BJ's stock, raising its price target by $1 to $29.

Sterne Agee's Collier reiterated a buy rating on the bar and grill chain, citing the company's "impressive" quarterly results. She raised her earnings expectations for 2010 and 2011, and upped her price target on the stock to $33.

She told TheStreet she likes BJ's because it boasts unit level returns in excess of 30%, better than the industry average. She said its comps have outpaced sector peers for years, a trend she expects to carry on into 2011 -- all despite the fact that a bulk of its stores are in California, a market hit particularly hard by unemployment. "Very impressive," she said.

Like Cheesecake and Texas Roadhouse, BJ's has done very well in the upper-mid-scale-casual segment, West added, again because of its continued focus on customer service.


Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

DineEquity ( DIN)

Year-to-Date Share Price Percentage Gain: 120.7%

Market Capitalization : $966 million

DineEquity, the operator of Applebee's and IHOP restaurants , is an example, like Ruby Tuesday of a stock with relatively poor fundamentals but with a stock price so depressed at the beginning of 2010 that it simply rode the overall market's move higher throughout the year.

Also like Ruby Tuesday, DineEquity focused heavily on "extreme discounting" to get customers in the door, training customers to only come in and buy when heavy promotions are offered. (Think Applebee's big promotion of two entrees plus an appetizer for $20. Brinker International's Chili's offered the same thing. With such similar menus among the pair, customers' opt to go where the discounts are steeper.)

DineEquity said in November its quarterly profits edged 1.3% lower year-over-year to $7.8 million, or 44 cents per share. Revenue ticked up 0.5% to $335.4 million.

Domestic systemwide comps at Applebee's grew by 3.3% in the quarter, reflecting higher average guest checks, including a 1.7% increase in menu pricing, partially offset by declines in guest traffic. At IHOP restaurants, domestic systemwide comps edged up 0.1%, reflecting higher average guest checks, partially offset by declines in guest traffic.

Chipotle Mexican Grill

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Chipotle Mexican Grill ( CMG)

Year-to-Date Share Price Percentage Gain: 193.6%

Market Capitalization : $8.01 billion

It's no surprise that industry darling Chipotle Mexican Grill rounds out TheStreet's list of the best-performing restaurant stocks of 2010.

Like fast-casual peer Panera, Chipotle appeals to consumers looking for quick, high-quality eats at reasonable prices.

In late October, Chipotle posted a healthy 23% jump in quarterly revenue to $476.9 million . Profits surged 39.7% to $48.2 million, or $1.52 per share.

Chipotle handily beat expectations thanks in large part to an 11.4% jump in comps.

RBC Capital Markets maintained a sector perform rating on Chipotle shares following its stellar earnings report, and raised its price target to $185. West maintained his buy rating, and upped his price target to $215, from $183.69.

Friday morning analysts from Morgan Stanley issued a downgrade on Chipotle shares to equal weight, from overweight, leading the chain's stock sharply lower on the session to give up some of its 2010 gains.

>> Chipotle, Buffalo Wild: Dining Winners & Losers

In the earnings report Chipotle said comps would grow by a high single-digit percentage for 2010, and a low single-digit percentage for 2011.

West expected comps growth of 7%, and 13% unit growth leading to 19% to 20% revenue growth. His EPS expectations were two cents below consensus at $1.28 per share, though he noted that Chipotle "remains the top high-growth company in the restaurant space and continues to gain market share."

The analyst was looking for higher gross margins, based on lower food costs and improved efficiencies, to offset higher labor and operating expenses.

Chipotle said it opened 22 new restaurants, bringing the total restaurant count to 1,023, and anticipates opening between 135 and 145 additional restaurants next year.

-- Written by Miriam Marcus Reimer in New York.

>To see these stocks in action, visit the 10 Restaurant Stock Winners portfolio on Stockpickr.

>To contact the writer of this article, click here: Miriam Reimer.

>To follow the writer on Twitter, go to http://twitter.com/miriamsmarket.

>To submit a news tip, send an email to: tips@thestreet.com.


>>See our new stock quote page.

Get more stock ideas and investing advice on our sister site, Stockpickr.com.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

If you liked this article you might like

Facebook's Stock Is in a Full-Blown Crisis

Facebook's Stock Is in a Full-Blown Crisis

Fed Expectations as Useful as a Screen Door on a Submarine: Market Recon

Fed Expectations as Useful as a Screen Door on a Submarine: Market Recon

Facebook, Tariffs, Nike and Starbucks - 5 Things You Must Know

Facebook, Tariffs, Nike and Starbucks - 5 Things You Must Know

Jim Cramer: Retail Stocks Could Really Roar on a Market Snapback

Jim Cramer: Retail Stocks Could Really Roar on a Market Snapback

Next Week's Market Game Plan: Cramer's 'Mad Money' Recap (Friday 3/16/18)

Next Week's Market Game Plan: Cramer's 'Mad Money' Recap (Friday 3/16/18)