5 Stocks to Buy as Restaurants Go Digital

NEW YORK (TheStreet) -- Restaurants are increasingly embracing digital technology and this could mean big profits for the companies and investors, too.

"The convergence of restaurants and technology is reaching a tipping point, driving the creation of new business models, as well as significant opportunities and challenges for industry players," according to a Pacific Crest Securities research note. "Companies that lever key technology attributes (which we call 'Digital DNA') will be well positioned to gain out-sized market share and industry profits. The opportunities for industry change and market share shifts remain underappreciated." Pacific Crest Securities is a subsidiary of KeyCorp (KEY).

The analysts point out four reasons why technology is important to restaurant operations. Technology: alters competitive positions; increases guest spending; improves customer acquisition and experience; and lowers cost to serve, according to the note.

Consumers are rapidly embracing restaurant tech innovations, the note said. For instance, approximately 10 million customers have downloaded Domino's Pizza (DPZ) mobile app and more than 50% of Papa John's (PZZA) U.S. sales are through digital devices.

So how can investors take advantage of this digital "convergence"? Pacific Crest named five stocks -- three restaurant chains that are embracing digital technology and two tech companies providing the payment solutions and processing -- to buy now. TheStreet added ratings from TheStreet Ratings for added perspective.

TheStreet Ratings, TheStreet's proprietary ratings tool, 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.

Note: Year-to-date returns are based on June 18, 2015 closing prices.

DPZ Chart DPZ data by YCharts

1. Domino's Pizza Inc. (DPZ)
Market Cap: $6.2 billion
Year-to-date return: 19.5%

Domino's Pizza, Inc., through its subsidiaries, operates as a pizza delivery company in the United States and internationally. The company operates through three segments: Domestic Stores, Supply Chain, and International Franchise.

Pacific Crest Securities Rating: Overweight, $120 price target
Pacific Crest said:
Domestic [mid-single-digit same restaurant sales] gains; International 10% net unit growth through 2018, [mid-single-digit same restaurant sales] gains; 60% of EPS growth; EBIT margin expansion 60-70 bps annually driven by increasing franchise mix; Mid-to-high teens EPS and FCF/share growth; Maintain 4.0-5.0x financial leverage (currently 4.2x)

TheStreet Ratings: Buy, B-
TheStreet Ratings said:
"We rate DOMINO'S PIZZA INC (DPZ) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, growth in earnings per share, increase in net income and solid stock price performance. We feel its strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7.4%. Since the same quarter one year prior, revenues rose by 10.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • DOMINO'S PIZZA INC has improved earnings per share by 14.1% 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, DOMINO'S PIZZA INC increased its bottom line by earning $2.86 versus $2.47 in the prior year. This year, the market expects an improvement in earnings ($3.45 versus $2.86).
  • 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 14.4% when compared to the same quarter one year prior, going from $40.47 million to $46.29 million.
  • Net operating cash flow has significantly increased by 134.07% to $84.75 million when compared to the same quarter last year. In addition, DOMINO'S PIZZA INC has also vastly surpassed the industry average cash flow growth rate of -11.66%.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 52.57% over the past year, a rise that has exceeded that of the S&P 500 Index. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
PZZA Chart PZZA data by YCharts

2. Papa John's International Inc. (PZZA)
Market Cap: $2.9 billion
Year-to-date return: 30.1%

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.

Pacific Crest Securities Rating: Overweight, $78 price target
Pacific Crest said:
Domestic [mid-single-digit same restaurant sales] gains; International 15-17% net unit growth through 2018; [mid-single-digit same restaurant sales] gains, 35-40% of EPS growth; EBIT margin expansion 60-70 bps annually driven by international segment profit improvement; Mid-teens EPS growth and ~20% FCF/share growth.

TheStreet Ratings: Buy, A-
TheStreet Ratings said:
"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, impressive record of earnings per share growth and increase in net income. We feel its 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 7.4%. Since the same quarter one year prior, revenues slightly increased by 7.7%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • PAPA JOHNS INTERNATIONAL INC has improved earnings per share by 22.2% 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 ($2.07 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 15.1% when compared to the same quarter one year prior, going from $19.31 million to $22.24 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 significantly increased by 50.86% to $40.25 million 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 -11.66%.
RRGB Chart RRGB data by YCharts

3. Red Robin Gourmet Burgers Inc. (RRGB)
Market Cap: $1.2 billion
Year-to-date return: 13.8%

Red Robin Gourmet Burgers, Inc., together with its subsidiaries, develops, operates, and franchises casual-dining and fast-casual restaurants in the United States and Canada. As of December 28, 2014, it had 514 restaurants, including 415 company-owned restaurants and 99 franchised restaurants.

Pacific Crest Securities Rating: Overweight, $100 price target
Pacific Crest said:
low-single-digit same restaurant sales gains; EBIT margin expansion 20-30 bps annually driven; Mid-teens EPS growth through 2016.

TheStreet Ratings: Buy, A-
TheStreet Ratings said:
"We rate RED ROBIN GOURMET BURGERS (RRGB) 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, growth in earnings per share, increase in net income, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7.4%. Since the same quarter one year prior, revenues rose by 15.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • RED ROBIN GOURMET BURGERS has improved earnings per share by 41.5% 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, RED ROBIN GOURMET BURGERS increased its bottom line by earning $2.25 versus $2.23 in the prior year. This year, the market expects an improvement in earnings ($3.18 versus $2.25).
  • 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 38.7% when compared to the same quarter one year prior, rising from $11.94 million to $16.57 million.
  • The current debt-to-equity ratio, 0.38, is low and is below the industry average, implying that there has been successful management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.24 is very weak and demonstrates a lack of ability to pay short-term obligations.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

 

PAY Chart PAY data by YCharts

4. VeriFone Systems Inc. (PAY)
Market Cap: $4.1 billion
Year-to-date return: -2.7%

VeriFone Systems, Inc. designs, markets, and services electronic payment solutions at the point of sale (POS) worldwide.

Pacific Crest Securities Rating: Overweight, $39 price target
Pacific Crest said:
We see significant TAM expansion as EMV, encryption and Apple Pay ramp; We think Verifone can restore 1.2% of the 5-6% operating margin gap relative to Ingenico in 2015 and 3.9% by 2016. We see sustainable high single-digit growth as retailers invest in new technologies. Disintermediation fears are overstated, in our view.

TheStreet Ratings: Hold, C
TheStreet Ratings said:
"We rate VERIFONE SYSTEMS INC (PAY) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and impressive record of earnings per share growth. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 22.5%. Since the same quarter one year prior, revenues slightly increased by 5.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.91, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.25, which illustrates the ability to avoid short-term cash problems.
  • 45.96% is the gross profit margin for VERIFONE SYSTEMS INC which we consider to be strong. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, PAY's net profit margin of 3.58% significantly trails the industry average.
  • Net operating cash flow has declined marginally to $56.33 million or 0.36% when compared to the same quarter last year. Despite a decrease in cash flow VERIFONE SYSTEMS INC is still fairing well by exceeding its industry average cash flow growth rate of -11.72%.
  • In its most recent trading session, PAY has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.

 

VNTV Chart VNTV data by YCharts

5. Vantiv Inc. (VNTV)
Market Cap: $5.8 billion
Year-to-date return:  17.9%

Vantiv, Inc., through its subsidiary, Vantiv Holding, LLC provides payment processing services in the United States. It operates through two segments, Merchant Services and Financial Institution Services.

Pacific Crest Securities Rating: Overweight, $47 price target
Pacific Crest said:
We are modeling ~8% merchant pro forma growth in 2015. We like Vantiv's acquisitive strategy and expect solid execution. Margins should begin to expand in 2015. We expect stable consumer and retail trends, which should yield solid merchant transaction growth.

TheStreet Ratings: Buy, B
TheStreet Ratings said:
"We rate VANTIV INC (VNTV) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 22.5%. Since the same quarter one year prior, revenues rose by 31.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has increased to $101.84 million or 20.24% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -11.72%.
  • 44.22% is the gross profit margin for VANTIV INC which we consider to be strong. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, VNTV's net profit margin of 2.69% significantly trails the industry average.
  • Compared to its closing price of one year ago, VNTV's share price has jumped by 25.25%, exceeding the performance of the broader market during that same time frame. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • VANTIV INC's earnings per share declined by 27.8% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, VANTIV INC reported lower earnings of $0.72 versus $0.88 in the prior year. This year, the market expects an improvement in earnings ($2.14 versus $0.72).

 

 

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