Investors in the restaurant industry are on edge following a mixed earnings report from burrito superstar Chipotle Mexican Grill Inc.
Last week, Barron’s ran a compelling bear piece on Chipotle — forecasting a 35% fall in shares from current levels.
Not a bad call. But senior analyst Jonathan Rodriguez tipped Wall Street Daily readers off to the burrito factory’s inevitable decline nearly a year ago.
In fact, readers who shorted shares at the time had the opportunity to snag a gain of more than 20% in just a few months.
Don’t worry if you missed out, though. As Jonathan points out in his article below, there are still plenty of gains to be harvested from restaurant stocks.
Especially now that the industry’s trajectory is about to take make an abrupt reversal…
Forget Chipotle… Feast on This Small-Cap Dining Play Instead
Chipotle isn’t the only restaurant company to hit a rough patch recently.
The industry had enjoyed several years of solid same-store comps driven by low interest rates and low fuel costs. Consumers who spent less at the pump could spend more on dining out.
But growth has hit a speed bump.
As the margin between the cost of dining out and staying home has fallen, more Americans are eating at home.
However, President Trump’s nationalist policy proposals are setting the stage for what could be an epic turnaround for restaurants.
You see, bars and restaurants pay some of the highest taxes in the United States.
Jeremy Bowman of The Motley Fool reports that restaurants shell out as much as 40% in taxes to Uncle Sam.
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But if the president is successful in reducing the corporate tax rate to 15% or 20%, hundreds of millions of dollars will be added to bottom lines across the industry.
In other words, it’s time to buy the dip in dining.
Here’s a company that’s well positioned to capture the windfall…
Dine out and Watch the Profits Roll In
DineEquity Inc. (DIN) is the parent company of the iconic Applebee’s and International House of Pancakes restaurants.
The company boasts nearly 60 years of experience in the family dining industry — with nearly 3,800 restaurants in operation around the country.
DineEquity sports a market cap of just $1.2 billion.
Revenue has dipped slightly over the last five years along with the company’s peers.
But thanks to cost-cutting and strategic share buybacks, DineEquity has posted earnings growth of 9% over the last five years, slightly outperforming the industry.
Shares trade at just 12 times earnings — a 51% discount to the industry and 40% below the S&P 500.
The stock also trades at 4.8 times book value — 63% below the industry.
And the company’s operating margin is double the size of the peer average.
To top it off, DineEquity also offers a 6% yield — more than twice the yield on the S&P.
Now, what would a tax cut do for the company?
In 2015, DineEquity paid an effective tax rate of 37.7%.
All things being equal, a 20% reduction in its taxes could add $32 million to net income — potentially boosting annual earnings by a whopping 33%.
That’s nothing to scoff at!
Since shares have struggled along with broader consumer discretionary stocks, DineEquity is now priced at an incredible discount to the market.
So it stands to get a yuge benefit from a tax cut and domestically focused economic policy.
Now’s the time to load your plate up with these sizzling shares.
On the hunt,
Senior Analyst, Wall Street Daily