Red Robin Gourmet Burgers, Inc. (RRGB) has tapped into both the fast casual restaurant trend that is sweeping consumers across the nation while also tapping into the quick-service restaurant consumer base with its lower-priced Tavern platform, says Will Slabaugh, Research Analyst at Stephens Inc.
“Red Robin is a standout in that $12 to $15 check average range, which we view as the core causal diners. They have what I consider to be a top-tier management team — has done a great job of promoting the increasingly important everyday value piece of the menu. They are also giving their customer a reason to trade up whenever they want to,” Slabaugh said.
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Slabaugh says the Tavern platform of burgers for $6.99 taps into QSR as well, giving Red Robin customers the chance to move up or down the value chain without changing locations.
“Essentially, as a Red Robin customer, if I want to go out and eat a burger for $6.99, I know I can do that every single day. So they have also probably done the best job among their peers of engaging and communicating with customers to drive involvement in their loyalty program and menu initiatives through digital social media. It continues to be a great success story, whereas for most of the industry, loyalty and digital and social media really hasn’t been a big of a factor,” Slabaugh said.
Analyst Will Slabaugh of Stephens Inc. says Krispy Kreme Doughnuts’ (KKD) recent pullback has made it more attractive, as the company is experiencing high new unit returns and is expected to become even more profitable than it has been historically.
“This is a company that went through a boom and bust back in early 2000s. It had a good year last year where the stock more than doubled, but it has pulled back recently and become increasingly attractive. Some observers are worried that same-store sales growth is going to turn negative after being in double-digits for much of last year, and our channel checks indicate that that is not the case,” Slabaugh said.
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Slabaugh points to Krispy Kreme’s continued positive sales trajectory and management’s new growth plans as drivers behind the company’s future profitability.
“The new unit returns are fantastic and near industry highs. I think Chipotle is the only one with better new unit returns than Krispy Kreme at this point. In short, the management team is putting a very new, smarter way of growth into place, and I think it is going to make for a much more profitable company for shareholders than it has been historically,” Slabaugh said.
Chief Investment Officer Ryan Crane of Stephens Investment Management says Stericycle Inc (SRCL) is one of his firm’s core growth stocks, as the waste management company has offered consistent, solid earnings for the past decade.
“Stericycle is a very consistent, very, very predictable company. In fact, if you were to pull up a history of Stericycle’s quarterly earnings or quarterly revenues over the last five or 10 years or something like that, it’s been incredibly stable,” Crane said.
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Stericycle Inc has flown under the radar of other waste disposal companies, Crane says, and with its specialized business has seen consistent and predictable growth.
“[Stericycle has] carved out a niche business of very profitable, very high recurring revenues, with very sticky customer relationships,” Crane said. “It’s as consistent as I have ever seen a company in terms of their ability to grow revenues quarter in and quarter out.”
Managing Director James Hamel of Artisan Partners has been slowly lessening his position in eBay Inc (EBAY) due to PayPal’s increased competition with newer virtual payment systems.
“We believe PayPal’s profit cycle is much more mature now. It’s still growing at a nice rate, but PayPal faces an enormous amount of new competition from what we believe will be an emerging trend in the not-too-distant future — virtual payment systems,” Hamel said.
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Hamel points to products such as Square and Google Wallet as competitors for PayPal, and he also expects other systems to surface as this trend continues.
“Perhaps even Apple will have a payment scheme. The competition for virtual wallets that are secure and more easily deployed is creating a competitive headwind for PayPal,” Hamel said.
“The valuation is still very reasonable, so we haven’t completely eliminated eBay from the portfolio. But we believe it just doesn’t have the acceleration that we saw,” Hamel added.
Managing Director James Hamel of Artisan Partners says IHS Inc. (IHS) is a stock pick with unmatched franchise value that is reasonably priced and showing 75% recurring revenues each year.
“I think of IHS as the Bloomberg-like data set provider for the energy industry…that repository of information that’s mission-critical — everything from the historical list of wells driven to productivity to who owns land, to what have the transaction values been in M&A through time — has been aggregated over a long period by IHS,” Hamel said.
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IHS Inc. also has a similar model for environmental and supply chain management, Hamel says. Additionally, IHS is seeing recurring revenues with a high retention rate and is expected to increase its organic growth.
“The franchise value isn’t yet well-recognized globally…which means it’s very reasonably priced even today, in our view, particularly given the fact that about 75% of its revenues recur every year with a very high retention rate,” Hamel said.
“We think IHS is on the cusp of a topline acceleration from about 4% to 5% organic growth most recently, to perhaps toward 7% to 8% organically,” Hamel added.
Portfolio Manager Ramin Arani of Fidelity Management says Michael Kors Holdings Ltd (KORS) has significantly outperformed market expectations since going public in 2011, showing strong earnings growth as well as consistent same-store sales growth.
“This is a kind of stock that embodies some of the attributes and factors I look for when researching stocks…We thought Michael Kors would grow a lot faster than the market thought, but they’ve managed even to outperform even our rather aggressive expectations,” Arani said.
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Additionally, Arani says that Michael Kors Holdings has shown expanding margins, efficient use of capital and multiple expansion. One of the big drivers has been the company’s strong same-sales performance, he adds.
“They have been showing same-store sales growth very consistently. On top of that they have been growing stores and adding new products, among other things. This is therefore an example of the kind of company we look for,” Arani said.
Macquarie Group’s Consumer Analyst Elaine Lai’s favorite name in the Chinese restaurant sector is Yum! Brands, Inc. (YUM), due to the company’s successful growth over the last 10 years and its future potential in China.
“We have seen rapid expansion carried out by foreign corporations…because these are companies with very strong management capabilities and the knowledge to replicate the industrialized food production process. These companies were able to replicate their business model on Mainland China,” Lai said.
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Specifically, Lai points to Yum! Brands, as the company operates over 5,000 restaurants in China, almost all of them self-operated, which translates to profits. Additionally, the company has the back-end support to continue its growth.
“This is by far the first company in the whole Greater China restaurant sector in terms of execution ability and also for the potential for growth…because of urbanization, because new cities are created and then more and more people are adopting an eat-out kind of lifestyle,” Lai said.
“A lot of the Chinese local brands are not able to expand, because they don’t have the back-end support and they don’t have a real ability to continue to grow,” Lai added. “Yum! Brands, however, has over 1,000 people just looking at real estate, just understanding, analyzing the traffic journey every single city in China.”
Senior Analyst Glenn Novarro of RBC Capital Markets foresees Johnson & Johnson (JNJ) experiencing strong pharmaceutical growth and a recovery of consumer sales growth in 2014, followed by outperformance in operating margins in 2015.
“We think Johnson & Johnson has the fastest-growing pharmaceutical business in the world in terms of revenue growth over the next few years. They’re bringing more new products to the market than any pharmaceutical company, and they don’t have any major patent issues in the near term,” Novarro said.
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Johnson & Johnson is also focused on its consumer business, bringing back products such as Children’s Tylenol and Children’s Motrin, Novarro says. He expects the product spend to slow after this year, resulting in an outperformance in operating margins.
“We think there is a better chance for a significant gain in 2015. We think that some of the spend behind the new pharmaceutical products and the consumer re-launches will start to slow, and that’s going to drive a significant outperformance in operating margins in 2015.” Novarro said.
James D. Hamel, Managing Director of Artisan Partners, anticipates up to $5 billion in sales for Biogen Idec Inc’s (BIIB) new MS drug Tecfidera, in addition to other opportunities in its pipeline.
“We’re very excited about a new drug from Biogen recently approved and now in commercialization called Tecfidera…it could do in excess of $1 billion in sales in its first year of commercialization, perhaps on its way to $5 billion,” Hamel said.
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Hamel sees additional opportunities in Biogen’s pipeline with approximately six drugs that are in the testing process, particularly one that would address Alzheimer’s. Thus Biogen is a franchise with the potential to become much larger in the future, Hamel says.
“There is a drug in the pipeline that would address Alzheimer’s that we haven’t placed any value on yet. But if Biogen were successful in commercializing it in the future, it could be a $7 billion, $8 billion, $9 billion, $10 billion drug,” Hamel said. “Biogen is a strong franchise, still reasonably valued in our opinion, with a great pipeline.”
Timothy A. Hoyle, a Vice President and Director of Research at Haverford Trust Company, says QUALCOMM, Inc. (QCOM) is in a position to collect royalties on all 4G telecom products for the next decade and beyond.
“Any handset or telecommunication product which utilizes 4G networks has to pay QUALCOMM a royalty rate for utilizing their intellectual property. These industry standards have been voted on and are going to be in place for the next decade,” Hoyle said.
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Hoyle also touts QUALCOMM’s competitive edge in the mobile chip market, as the company’s Snapdragon chip is number-one in the world running mobile phones. However, it is QUALCOMM’s licensing business that attracts Hoyle to the stock.
“While we believe that the next 10 years are pretty much scripted, QUALCOMM is also spending billions of dollars a year on R&D so that next-generation products will utilize QUALCOMM intellectual property as well. So you can easily forecast outgrowth through 2020,” Hoyle said.
