Can Chipotle, McDonald’s Repeat its Stellar Gains in 2012 ?

So 2011 has been a wonderful year for restaurant stocks. The year-to-date gains for McDonald’s (NYSE:MCD), Yum! (NYSE:YUM), Starbucks (NASDAQ:SBUX) have been more than 25%, 15% and 30% respectively. For Chipotle (NYSE:CMG), it is a staggering 60%. The S&P 500 Index, on the other hand, is more or less at the same level where it was at the beginning of the year. In spite of the recessionary fears, restaurant stocks have been able to deliver a stellar performance.

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Recession is not a necessarily a bad thing

That must be a curious statement, but fortunately for the fast food and fast-casual segment of the industry it’s true.

A recession means more consumers avoiding expensive eating out options, visiting their restaurants. Recessionary fears have been exacerbated in the second half of 2011 mainly due to Treasury rating downgrade and European debt crisis. Whereas the markets have plummeted in the second half of 2011, restaurant stocks have maintained their steady growth, helped partly by the lower crude prices. And restaurant stocks, except for isolated individuals, hardly outperformed the market in the first half of 2011. In fact, McDonald’s and Yum! brands, the largest and third largest restaurant stocks by market cap, underperformed the markets.

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The Numbers Can be Deceptive

The markets soared during the Santa Claus rally last year and in the first quarter of 2011 whereas restaurant stocks, in general, had a torrid time. So, on choosing a different time frame such as 1 complete year instead of YTD, we see a lower disparity between the performance of restaurant industry and the market.

Price Hikes

Commodity prices in 2008 and 2009 were well below the current prices which meant that restaurants could maintain a healthy profitability for these years. However, everything from food to crude has seen a sharp increase in the years 2010 and 2011. To maintain their profitability, a large number of restaurants have increased their prices in 2011. But this price hike was on a low base and another round of price hike might not go down well with consumers. We could see reduced profit margins in the coming year which could adversely affect the stock price.

Here you can see our forecast for Starbucks EBITDA margin

You Can Also See Our Full Analysis For Starbucks

Outlook for 2012

We expect a correction going forward. Recent exuberance in the industry has been due to a better than expected holiday spend combined with an overall increase in the prices. As mentioned, the industry faced a correction in the first half of 2011. We expect a similar correction followed by a slow growth. We also expect the commodity prices to remain firm for the foreseeable future which can eat up the profitability of the industry.

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