(Bankruptcy Watch: 14 Risky Restaurant Stocks report updated with Sonic's quarterly earnings results.)
NEW YORK ( TheStreet) -- Amid concern over a possible double-dip recession -- or at least some stall in the recovery -- in the midst of rising gasoline and food prices, bankruptcy is a real concern for any company, and the restaurant sector is certainly not immune.
Notably, Sbarro, the famously mediocre Italian chain, went bankrupt in April. The Perkins and Marie Callender's restaurant chains filed for bankruptcy in early June, with plans to close 65 of their 600 locations and cut 2,500 jobs. Even celebrity-backed restaurants have fallen: Eva Longoria's Las Vegas restaurant Beso filed for bankruptcy in January, and Michael Jordan's The Steakhouse NYC, which overlooks the renowned lobby of the Grand Central Terminal, went under in November of last year. One way to test if a company runs the risk of filing for bankruptcy is through the Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968. The Altman Z-Score measures several aspects of a company's financial health -- including working capital, total assets, total liabilities, market capitalization, sales, retained earnings and earnings before interest & taxes (EBIT) -- to forecast the probability of it going bankrupt within two years. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior to the filing, according to Investopedia. On a general basis, companies with a Z-Score higher than 3 are considered safe with little danger of bankruptcy, while those with a score of 1.81 or lower are considered distressed and are more likely to go bankrupt. Anything in between is a grey area. While the formula, of course, isn't the only indicator of financial health -- and is by no means a guaranteed barometer of a company's bankruptcy risk -- it is a metric worth considering for those restaurants that fall below the safety zone. Those with a declining Z-Score year over year may also raise a red flag. Taking this into account, we offer the restaurant chains with a Z-Score below 3 for the trailing 12 months, according to data from I-Metrix, from the least risky to the most risky, with a little detail on what each company has been up to lately. We limited our analysis to companies with a market capitalization of at least $100 million, but you can click through to the last slide for a complete chart of the 20 Riskiest Restaurant Stocks.
TheStreet Ratings' model recently upgraded Red Robin to buy from hold with a $42 price target, representing 20% upside from recent trading prices. TheStreet's model upgraded the shares because of the 75% EPS improvement in the most recent quarter. At a P/E of 19 times 2012 earnings, the stock is trading at a slight premium to the rest of the casual-dining group, Stuart noted. It's a premium that's warranted, according to Bank of America, "given that Red Robin's turnaround is just starting and has potential to drive EPS substantially higher."
Even so, Sonic's stock has been a perennial laggard since the recession, falling from a high of $25.09 in 2007 to less than $9 earlier this year. Lynch put that performance into context, noting that shareholders have endured an annualized decline of 25% since 2008. Sales and net income dropped 12% and 25% annually, on average, over that span. Morningstar, seeing value in the depressed equity, upgraded it to five stars, the researcher's highest rating, on Dec. 31, Lynch reported. Stressing margin buoyancy and uniqueness of format, Sonic is Morningstar's preferred play in the QSR, or quick-service restaurant, space. On June 22, Sonic posted a fiscal third-quarter loss of $4.7 million, or 8 cents loss per share. On an adjusted basis however, excluding costs associated with the early extinguishment of debt, earnings came in at 21 cents per share. Revenue rose 4.2% year-over-year to $152.1 million in the May-ended quarter. The average estimate of analysts polled by Thomson Reuters was for earnings of 18 cents a share on revenue of $151.4 million. Systemwide same-store sales increased 3.9%, including a 3.6% uptick at franchised drive-in locations and 6.5% at company-owned restaurants.
The stock remains far lower than its pre-recession levels near $20 but it has gained around 20% in the past 12 months. Even so, Ruth's overall profit fell to its lowest level in years in 2010. But many analysts are optimistic that as the economy improves, high-end diners will return to their spending ways. The consensus is for Ruth's earnings-per-share to grow to 36 cents in 2011, and to 45 cents in 2012.
On June 1 Landry's extended its $137.2 million offer until July 29.
RealMoney.com contributor Alan Farley noted that Wendy's/Arby's disclosed in January its intention to sell Arby's, triggering a strong volume surge that has, so far at least, failed to translate into higher prices. Wendy's/Arby's is divesting Arby's so it can focus its attention on reinvigorating its namesake restaurant brand. The sale of Arby's "will allow Wendy's to focus on revitalizing their core brand," Scott Rostan, principal and founder of Training The Street, told TheStreet. Wendy's/Arby's management will no longer be "distracted with chatter regarding Arby's performance or potential sale," he added.
In its recent quarter Wendy's/Arby's narrowed its losses as revenue grew and the company plans to raise prices to help offset increasing commodity costs. Wendy's/Arby's also lowered its 2011 guidance for earnings before interest, taxes, depreciation and amortization to a range of $330 million to $340 million, well below analysts' consensus for EBITDA of $401.7 million.
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