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
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
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 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
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
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.
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
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.
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
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
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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ARCHER DANIELS (ADM): Free Stock Analysis
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