For Subscribers

Get the complete article now!

Five analysts and top management from fourteen sector firms examine the Restaurant Industry sector in this special 91-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info404.htm

TWST: Andy, you touched on earnings estimates. For the most part, have earnings reported for the first and second quarters of 2001 been in line with your expectations?

Mr. Barish: It’s been a tale of two categories. The larger companies have had the earnings flexibility to manage through some of the challenges and still hit expectations, although it’s somewhat different from the last couple of years, where we’ve had many of these companies exceeding expectations. In terms of the larger companies, there has been a deceleration of earnings growth, back to more normalized levels, but on a relative basis, as I think Joe mentioned in his opening remarks, that’s still a positive in this kind of environment. On the other side of the coin some of the smaller companies have had to adjust to a more difficult environment, both sales- and cost-wise, and have had a little bit more difficult time meeting expectations. In fact, a handful of companies have seen estimate reductions over the last quarter or two, and they continue to have slightly slower outlooks for the second half as well.

TWST: Andy, as the market’s corrected, or perhaps despite the fact that the market’s corrected, it appears that the restaurants have been outperformers in the broader market. Is this outperformance sustainable?

Mr. Barish: I believe it will be. We’re now about 18 months into outperformance for the restaurant sector, when you consider all of calendar 2000 and the first half of 2001. I still look at some drivers moving forward, including the relative earnings growth of many of these companies, which is still in the mid-teens for some of the larger companies. Growth rates are even higher for some of the unit growth stories, and that’s much more appealing today, when the S&P 500 earnings are down 15%-20% and are expected to be down 10%-12% for the year. The relative arguments about earnings growth that created a lot of apathy toward restaurant stocks back in the 1998-1999 time frame, even when the fundamentals were quite strong, have now reversed, and the industry is showing good earnings power and good defensive qualities, while valuations, I believe, are still quite attractive, particularly if we get an early cycle recovery and start to see the economy pick back up. In that case, we could potentially see same-store sales start to improve for the industry later in this year, and maybe into 2002. I continue to think that would set the stage for not only a continuation of earnings growth, but also some valuation expansion that would drive outperformance.

TWST: Andy, what would your turnaround or surprise story be?

Mr. Barish: I would point to a small cap name that actually has been a huge performer. Panera Bread (Nasdaq:PNRA) is the leader in the quick-casual bakery/café segment, this emerging category between quick service and casual dining. They have about 300 restaurants currently and have grown the system about 25%-30%, mostly franchised. The reason I suspect that it will continue to pleasantly surprise is that even though the stock is pretty richly valued at more than 30 times next year’s numbers, the fundamentals of this company have been better than any in the restaurant industry. When you look at same-store sales, earnings growth, new unit growth, this is a company that really has been cranking it out.

This special conference issue includes:

1) Restaurant Industry - In an in-depth (13,000 words) Analyst Roundtable, Andrew Barish, Managing Director at Banc of America Securities, Joseph Buckley, Senior Managing Director at Bear, Stearns & Company, Mark Kalinowski, Vice President at Salomon Smith Barney and Janice Meyer, Managing Director at Credit Suisse First Boston, examine the outlook for the sector including, economic outlook, new restaurant concepts and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at nineteen sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Restaurant Stocks - In an in-depth (3,500 words) Analyst Interview, Damon Brundage, Vice President of Equity Research at Raymond James & Associates examines the outlook for the sector and shares specific stock recommendations.

4) CEO and Sponsored interviews (average 2,500 words). Top management of fourteen sector firms examine the outlook for their firm and the sector.