NEW YORK (TheStreet) -- Personal consumption spending has been growing at almost half the rate in the 21 quarters since the Great Recession compared to the average growth rate over the same period following prior recessions. Consumer spending on discretionary services, such as eating out at restaurants has been growing even less.
For a restaurant business to show growth in a slowly growing economy, it must take away business from other restaurants. In such a state of consumer restraint, only a few restaurant chains can be successful in growing revenue.
So what are the best restaurants investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which three restaurants made the list. And when you're done be sure to read about which mid-cap oil companies to sell now. Year-to-date returns are based on April 30, 2015 closing prices. The highest-rated stock appears last -- read more to see which one is No. 1.PZZA data by YCharts
3. Papa John's International Inc. (PZZA)
Rating: Buy, A-
Market Cap: $2.5 billion
Year-to-date return: 10%
Papa John's International, Inc. operates and franchises pizza delivery and carryout restaurants under the trademark Papa John's in the United States and internationally. The company also operates dine-in and delivery restaurants in certain international markets.
"We rate PAPA JOHNS INTERNATIONAL INC (PZZA) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, good cash flow from operations, growth in earnings per share and increase in net income. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 7.9%. Since the same quarter one year prior, revenues slightly increased by 9.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
- PAPA JOHNS INTERNATIONAL INC has improved earnings per share by 26.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, PAPA JOHNS INTERNATIONAL INC increased its bottom line by earning $1.76 versus $1.55 in the prior year. This year, the market expects an improvement in earnings ($2.05 versus $1.76).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 12.6% when compared to the same quarter one year prior, going from $18.81 million to $21.18 million.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, PAPA JOHNS INTERNATIONAL INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- Net operating cash flow has increased to $37.81 million or 42.51% when compared to the same quarter last year. In addition, PAPA JOHNS INTERNATIONAL INC has also vastly surpassed the industry average cash flow growth rate of -74.97%.
- You can view the full analysis from the report here: PZZA Ratings Report