(By Mani) The 2013 outlook does not paint a bullish picture on US restaurant stocks as same-store-sales growth slows and costs increase.
Sluggish industry comps could be exacerbated in early-2013 by tough weather-related grow-overs. Core comp drivers (i.e. job creation) remain at an irritating crawl and industry same-store-traffic to be "flat-to-down" in '13.
In this no-growth environment, market share battles will more clearly separate the traffic growers and bleeders—the primary driver of multiple expansion and contraction.
"We see limited room and reason for group-wide multiple expansion. Our list of best ideas is "bottoms-up" driven and based on conviction for EPS upside and outperforming fundamentals," Oppenheimer analyst Brian Bittner said in a client note.
Here are the top restaurant stock picks for 2013:
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Starbucks Corp. (NASDAQ: SBUX): There are many moving pieces to this puzzle that together form a best-in-class earnings trajectory for a brand that has never been stronger. The model supports upside to management's 15-20% EPS outlook in fiscal 2013 and possesses a unique coffee tailwind along with recent investments/acquisitions that could turn into earnings accretive drivers.
Jack in the Box, Inc. (NASDAQ: JACK): A "special-sit" type play within restaurants as the story transitions from restructuring/turnaround into free cash flow/growth.
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"EPS power remains underestimated and the appreciation for JACK's future earnings trajectory has yet to fully unfold, in our view," Bittner said.
The company possesses several non-operational earnings enhancers which could help boost next fiscal year's EPS well-over $2 while consensus is at $1.97. Interestingly, share buybacks and accretive Qdoba franchisee acquisitions are not modeled into consensus estimates.
Panera Bread Co. (NASDAQ: PNRA) represents a compelling "beat and raise" stock in 2013 owing to consensus estimates have not considered upcoming sales drivers, and food cost inflation for the company could be less than feared, and ability/strategy to raise price seems misunderstood.
"Beyond this year, we are attracted to the robust unit growth potential (50%+ cash-on-cash returns) and earnings algorithm that produces sustainable EPS growth of 20%+," the analyst noted.
Domino's Pizza, Inc. (NYSE: DPZ): The company's model possesses rare drivers that could provide an unusual acceleration in fundamentals and EPS upside in 2013. Domestic same store sales are equipped with easing comparisons, impactful product innovation and a secular technology tailwind. Meanwhile, international profits could re-accelerate as forex headwinds disappear while rising food costs are immaterial to EPS given the 3 percent co-owned model.