2 Restaurant Stocks Set to Trump Q4 Earnings Estimates

An industry that has never ceased to entice is food. And when it comes to fast food, people have an undying love for juicy burgers, appetizing pizzas, grilled sandwiches, delicious ice creams, and what not.

However, restaurant stocks failed to find favor with investors in 2016. As a result, most of the restaurateurs grappled with sluggish comps and soft traffic growth, which found reflection in the industry's stock-price performance. Over the past one year, the stock-price performance of the Zacks classified Retail-Restaurants industry lagged the broader S&P 500 index, with industry stocks up 0.4% compared with gains of 20.4% logged by the broader index.

Nevertheless, as per the National Restaurant Association, 2016 marked the seventh consecutive year of real sales growth in the restaurant industry. Notably, the industry's sales account for 4% of the U.S. GDP. Meanwhile, restaurateurs are going, all guns blazing, to counter comps and traffic issues with strong sales, digital initiatives and shift to consumer likings.

Investors should thus not shy away from parking their money in this space and cash in on its bountiful opportunities, given the generally optimistic outlook for business conditions in the months ahead.

Q4 So Far

The restaurant industry belongs to the broader Retail-Wholesale sector. Per the latest Earnings Outlook ,

as of Feb 15, 44.2% of the retail companies in the S&P 500 index have reported their results. We note that the beat ratios for this sector have been average (57.9% for earnings and 21.1% for revenues).

Turning our focus to restaurant stocks, it is to be noted that a soft consumer spending environment in the U.S. restaurant space has been resulting in lower traffic and comps over the past few quarters. The fourth quarter of 2016 was no exception.

This is evident from the results of key players like Brinker International, Inc. ( EAT ) and Buffalo Wild Wings Inc. ( BWLD ) whose earnings and sales missed estimates. Meanwhile, Chipotle Mexican Grill, Inc. ( CMG ) and Starbucks Corporation ( SBUX ) topped and met earnings estimates, respectively, while missed revenue estimates.

However, beating the sluggish trend, restaurant behemoths like McDonald's Corporation ( MCD ) and Dunkin' Brands Group, Inc. ( DNKN ) posted robust results beating both top- and bottom-line expectations.

Moreover, there are other companies in the space as well that are expected to stand tall in spite of the recent chaos and have the potential to beat earnings in their upcoming Q4 releases on the back of strong fundamentals and strategic initiatives. An earnings beat should help these stocks gain investor confidence and pave the way for stock price appreciation.

How to Pick the Right Stocks?

Picking the right stock for your portfolio could appear to be a daunting task given the wide range of companies in the restaurant space. One way to confine the list of choices this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP .

Earnings ESP is our proprietary methodology for determining which stocks have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

The combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) - and a positive Earnings ESP is usually an indication of an earnings beat. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

For investors seeking to apply this strategy to their portfolio, we have highlighted two restaurant stocks that may stand out this season:

Headquartered in Louisville, KY, Papa John's International, Inc. ( PZZA ), through its five reportable segments, operates and franchises pizza delivery and carryout restaurants in the U.S and internationally.

Various sales building initiatives such as menu innovation and provision of value offers along with focus on digital innovation to attract new customers and drive growth as well as efficiency, are expected to boost results in the to-be-reported quarter.

Papa John's posted a 14.00% positive earnings surprise in the previous quarter. Moreover, the company's earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 11.31%.

That said, for the upcoming release, Papa John's has an Earnings ESP of +4.55% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

The Zacks Consensus Estimate for the quarter's earnings is pegged at 66 cents per share.

Meanwhile, the company is slated to report fourth-quarter 2016 results on Feb 21, after market close.

Red Robin Gourmet Burgers, Inc. ( RRGB ) is a full-service casual dining restaurant chain that serves an assorted range of burgers. It also offers salads, sandwiches and other entrées.

Efficient menu innovation, focus on increasing speed of service, effective marketing strategy, unit expansion and remodeling programs to reinvigorate brands should drive fourth-quarter results.

Red Robin posted in-line earnings in the last reported quarter. The company's trailing four-quarter average earnings surprise stands at a positive 4.14%.

For the quarter to be reported, the company has an Earnings ESP of +13.79% and a Zacks Rank #3. The Zacks Consensus Estimate for the quarter's bottom line is pegged at 29 cents.

The company is set to report fourth-quarter 2016 results on Feb 21, after market close.

To Sum Up

Though the restaurant industry has its share of pitfalls, effective sales initiatives undertaken by its players have kept it going. Thus, we believe that keeping an eye on these companies that have the right combination of elements to post an earnings beat this quarter, could yield strong returns for your portfolio in the near term.

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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 Nasdaq, Inc.

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

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