I found this article from Investopedia on my favorite industry, restaurants, a good overview of what to look for when analyzing a restaurant. Even though restaurants can be very volatile and eat up a lot of cash, I think they're great long-term investments primarily because they are easy to understand and follow (most of them, anyway) and because people will always need to eat food. So, as long as the economy is in pretty good shape long-term, I think the restaurant industry will be a winner. The question is finding the companies who lead the way.
Sinking Your Teeth Into Restaurant Stocks
Investors who buy stock in fast food and casual dining chains have the potential to make a great deal of money. After all, Americans spend a lot of money each year eating out. According to the National Restaurant Association, the restaurant industry brings in $1.5 billion on a typical day in 2008.
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The restaurant industry can be a fairly capital intensive business. In other words, a large sum of money is often needed to acquire land or large leases, and to erect a viable location. To that end, investors should try to only seek out companies that are well funded or that have access to capital.
The first step is to take a look at the balance sheet, specifically the company's total cash position. Is it large enough to build out many new locations or to expand at the rate management is suggesting? The cost of every restaurant chain location is different, so you'll have to answer that based on the situation you are analyzing. Common sense dictates that if the company in question is losing money and has little cash on its balance sheet, it probably isn't in expansion mode.
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Companies that grow at a super-fast clip have the potential to generate big bucks for their shareholders. However, growing at an accelerated rate also has its risks. For example, if something goes wrong (such as the restaurant industry has a bad year or a particular location falters) the company may see its entire organization suffer.
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While total sales and bottom line numbers are vital to a restaurant's success, so are its same-store sales numbers. This metric tells the investor how certain stores are doing on an apples-to-apples basis by representing sales at stores in existence for more than one year.
This article gives you the basics of what to look for with restaurants. Restaurants make up the majority of my portfolio, and even though many restaurants haven't been performing real well lately I remain confident in their prospects. Personally, I like to see a company with a strong balance sheet (a good position of cash with minimal or no debt) as well as good cash flow production that fuels growth in the business (rather than using debt or stock financing). Of course, some companies will have unique situations and it's important to keep that in mind when analyzing any company. Some restaurants rely mainly on franchisees for growth (such as Nathan's Famous), while others completely own every restaurant (like Chipotle).
In any case, I've found that restaurants are very fun businesses to follow and analyze. It's easy to track progress in growth, financials, and efficiency, and because of that I think that with the proper analysis they can be very rewarding in the long run. And you can count on the fact that I'll be following several restaurants closely right here.
Tags:
analysis, chipotle mexican grill, investopedia, nathans famous, restaurants
Posted at: 06:05 PM | Add Comment
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