Have Restaurant Stocks Bottomed Out?

Governors in many states have approved the partial reopening of restaurants, offering relief to a once-booming industry brought to its knees by the coronavirus pandemic. Returning customers and employees will have to deal with new social distancing and sanitation rules, but the lighter restrictions should go a long way in relieving anxiety and stress generated by weeks of enforced quarantine and stay-at-home orders.

So is now the time to buy shares of publicly traded restaurant chains? Unfortunately, there’s no simple answer because these operations will continue to face headwinds that vary from location to location and from chain to chain. For starters, reopenings are unlikely to signal a return to normal business income because, as surveys indicate, more than half of the American public plans to avoid these venues until there’s a vaccine.

Continued Headwinds

In addition, reduced seating capacity will undermine a return to profitability at the same time that owners are trying to rebuild damaged balance sheets. This is less of an issue for big companies with unlimited access to credit markets than small operations that now have to repay government loans in addition to payroll, rent, and inventory. The public chains also have better access to pick-up and delivery services that have bolstered income since the shutdowns began in March.

A sharp rise in bankruptcies seems inevitable at this point, but publicly traded chains like McDonald’s Corporation (MCD) and Yum! Brands, Inc. (YUM) are better positioned than mom-and-pop eateries. It’s another story for regional chains like Ruth’s Hospitality Group, Inc. (RUTH), which got caught with its hand in the cookie jar, taking small business loans intended for private restaurants. It has since returned the cash, but the attempt confirms that these chains are running into liquidity issues.

Demographics are also affecting the group’s outlook because eating and travel habits for those over 50 are likely to change much more than those under 50. While younger folks are generally healthier and can withstand COVID infection without major trauma, older folks are at greater risk for life-threatening outcomes, raising the odds that they’ll continue aggressive social distancing long after politicians lift restrictions.

Hopeful Signs


Even so, hopeful signs continue to emerge. The Cheesecake Factory Incorporated (CAKE) made disturbing headlines in March after confirming that the chain wouldn’t have the capital needed to pay April rents at 294 locations. It received a $200 million strategic investment from a hedge fund in mid-April in exchange for a board seat, shoring up the company’s liquidity outlook just before governors began talking about winding down restrictions.

Last night, Cheesecake Factory reported a 12% same-store sales decline but beat first quarter 2020 earnings estimates by a wide margin, with a $0.04 profit instead of an expected $0.30 loss. Revenue at $615 million marked a 2.6% year-over-year increase despite the shutdown, with more than 200 locations offering take-out and delivery services that booked much higher than expected first quarter income.

The stock topped out at $67.14 in May 2017 and entered a downtrend that found support in the upper $30s in September. A recovery wave into the second quarter of 2018 posted a lower high near $60, ahead of renewed selling pressure that ended near the 2017 low in August. Price action into March 2020 completed a breakdown, dropping to a 10-year low at $14.52. The bounce through April failed to mount 50-day exponential moving average (EMA) resistance in the lower $20s, while the breakdown establishes new resistance in the upper $30s.

The on-balance volume (OBV) accumulation-distribution indicator reveals heavy bottom fishing and value hunting since late March, lifting to the highest high since July 2018 despite the seemingly bearish price pattern. The stock is running in place near $20 after last night’s earnings report but could find its way back to April resistance and break out, heading into a more formidable barrier in the upper $30s.

The Bottom Line

Publicly traded restaurant chains are showing signs of bottoming out, but the industry will continue to face stiff headwinds for the rest of 2020.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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