Subscribe to Entrepreneur for $5

Investors Cool To Top Food Stocks


Opinions expressed by Entrepreneur contributors are their own.

New York City-It was a topsy-turvy world for food-service stocks in the first quarter of 2001, as some of the top restaurant operators found themselves on a precipitous slide down the Wall Street trash chute.

The biggest casualties included last year's hottest IPO, Krispy Kreme Inc.; the two biggest public burger chains, McDonald's Corp. and Wendy's International Inc.; and upscale steakhouse operator Morton's restaurant group. All four finished among the 10 worst performing stocks in the industry for the three-month period ended March 30.

Several analysts noted that rising utility costs seem to be taking more of a toll on quick-service restaurants than on casual dining, because they have a significant impact on the smaller amount of discretionary income available to typical core users.

"Clearly the fast-food industry remains a difficult one, with all five national, non-pizza fast-food concepts-Wendy's, McDonald's, Burger King, KFC and Taco Bell-struggling to generate meaningful same-store sales growth," Salomon Smith Barney analyst Mark Kalinowski said. "This condition may persist for some time."

Among the conditions he cited that were having an impact on the restaurant industry were rising utility costs, the prospect of rising meat costs and public concern over safety in the meat supply because of problems in Europe, the increasing cost of labor and a slowdown in the economy.

Still, according to Bank of America securities analyst Andrew Barish, "Solid restaurant industry fundamentals have continued into 2001 despite the many signs of a slowing economy and a cautious consumer."

One of the big reasons for his confidence, Barish said, is the evolution of restaurants from "a consumer cyclical to a consumer staple" status, meaning that dining out has become more of a "life necessity" than a luxury.

The biggest beneficiary of that change is casual dining, Barish said. He noted that the movement of the baby-boomer generation into their higher-spending years and their "propensity to dine out" has led him to project same-store-sales gains for casual dining of between 3 and 5 percent. That's higher than the QSR projections of "slightly slower than 2 percent to 3 percent gains." -Nation's Restaurant News