3 Food/Retail Stocks to Satisfy Your Hunger this Earnings - Earnings ESP

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After a challenging 2013 and a not-so-great start to 2014, the U.S. food and restaurant industry is finally witnessing some encouraging signs. But growth has been marginal so far.

Per Black Box Intelligence and People Report, U.S. restaurant same-store sales were sluggish and rose just 0.3% in the second quarter, a marginal increase from a 0.2% decline in the first quarter, which was affected by extreme winter weather. Moreover, traffic declined 1.4% in the quarter.

The weak data reflects a sluggish labor market, changing consumer preferences beyond traditional restaurant chains, higher gasoline prices, and lower disposable incomes that do not allow much spending on restaurants. The same-store sales data in the second half of the year is expected to be higher but that's due to easier year-over-year comparisons.

The food and restaurant companies face other challenges too, the most concerning being the rise in food costs. Per the U.S Department of Agriculture, the ongoing drought in California could have large and lasting effects on fruit, vegetable, dairy and egg prices. It also expects drought conditions in Texas and Oklahoma to increase beef prices even higher. Given this scenario, food price inflation is expected to be 2.5% to 3.5% in 2014.

Moreover, retail prices of meat and seafood - key ingredients for restaurant stocks - have been pushed higher by disease and widespread drought. Wholesale beef prices are forecast to jump by 8% - 9% in 2014. Also, U.S. fish and seafood prices are forecast to rise 3.5% to 4.5% in 2014, up from 2.5% to 3.5% rise predicted last month.

Nevertheless, banking on its wide spectrum, the food/retail sector still remains a lucrative investment opportunity. Thus, betting on the future winners from the sector would be a prudent idea.

The Way to Pick Right Stocks
Picking the best stocks from the food/retail space is not a simple task. However, one way to narrow down the list of choices is by looking at stocks with a favorable Zacks Rank -  #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Zacks Earnings ESP .

Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.

Here are three food/retail stocks currently equipped with the right combination of elements to post an earnings beat:

Archer Daniels Midland Company ( ADM )

Ill-based Archer Daniels Midland Company procures, transports, stores, processes, and merchandises agricultural commodities and products. We have observed that this agri-business giant is undertaking strategic steps to manage its business portfolio to enhance returns. This is evident from the company's recent move of vending its South American fertilizer business and acquiring the remaining 20% minority stake of Alfred C. Toepfer International from Union InVivo.

With the most recent announcement of taking over Switzerland-based WILD Flavors GmbH, a provider of naturally sourced flavor for foods and beverages for 2.2 billion euros, the company has made its biggest ever acquisition deal. The transaction, expected to close by the end of 2014, will help Archer Daniels in diversifying its business portfolio from grain processing to a provider of natural flavors for food and beverages. Moreover, the deal also fulfills the company's target of investing over 60% of its capital expenditure toward expansion and gaining a foothold outside the U.S.

Archer Daniels, which has a Zacks Rank #3, while it has an ESP of +2.67%, will report its earnings on Aug 5 before the market opens.

Papa John's International Inc. ( PZZA )

One of the leading pizza delivery companies, Papa John's International Inc. is set to report second-quarter 2014 results on Aug 5, 2014, after the market closes. Based in Louisville, Kentucky, the company holds a Zacks Rank #2 (Buy) and an ESP of +4.88%.

Papa John's has been consistently delivering positive comps domestically as well as in the international markets over the past few quarters. The company's brand revitalization initiatives such as unit expansion and international expansion have contributed significantly to its comps growth.

Moreover, limited time offerings and menu innovation have continued to play an important part in generating revenues. The company is also investing in technology-driven initiatives like digital ordering in order to capitalize on the digital wave that has hit the U.S. fast casual restaurant sector.

Jack in the Box Inc. ( JACK )

Based in San Diego, CA, this restaurant company operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants in the United States.

The restaurant operator has been focusing on cutting costs to offset slower sales at Jack in the Box quick-service restaurants and to deliver profits. For the third quarter, same-store sales are expected to increase approximately 2% - 3% at Jack in the Box company restaurants versus a 1.2% increase in the year-ago quarter. Same-store sales are expected to increase approximately 3% - 4% at Qdoba company restaurants versus a 0.5% increase in the year-ago quarter.

The company is expected to report its earnings on Aug 6 after the market closes. The company has a Zacks Rank #3 and an ESP of +3.51%.

Bottom Line

The overall economic environment is improving, albeit at a slower pace. We believe that the above stocks with strong fundamentals and growth prospects are capable of quenching investors' hunger. Also, we believe that the food chains should focus on strategies that will help them alleviate the impact of increased costs. Implementing the right pricing strategy, increasing global presence and focusing on supply chain revenues may as well help these companies stay afloat.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Earnings

Referenced Stocks: ADM , PZZA , JACK

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