Home/Blog/Trading Ideas/Cheap Gas Is Filling Up Restaurant Seats

Cheap Gas Is Filling Up Restaurant Seats

14 January 2015 in Trading Ideas

The triple-play of a recovering economy, rising consumer confidence, and lower gasoline prices may be doing the trick for the restaurant industry.

A CNBC.com article recently noted that for the first time since November 2012, the industry’s same-store traffic grew this past October, according to data from Black Box Intelligence, which tracks more than 20,000 restaurants.1

The increases were “largely driven by gas prices having moderated nicely, so that’s been a nice relief for the consumer and freed up the budget,” Peter Reidhead, vice president of GuestMetrics told CNBC.com. The casual-dining and fine-dining sectors have shown the biggest improvements, he added.

Just as importantly, restaurants recently struggling with growth were also getting healthier. McDonald’s, which had seen domestic same-restaurant sales fall by 4.1% in September, saw a decline of only 1% in October.

Restaurant analyst Malcolm Knapp told CNBC.com that weaker retail sales often coincide with better restaurant sales as people with limited budgets make tradeoffs.

Better performance has also translated into an uptick in the shares of many publicly traded restaurant operators. Over the past three months, the Eating Out motif has gained 15.1%. During that same time period, the S&P 500 has gained 8.7%.

In the past 12 months, the motif has returned 20%; the S&P 500 is up 13.8%.

Helping matters has been the fact that gasoline prices have continue to drop. In December, drivers were paying 65 cents less for a gallon of gas than they were a year ago, which could lead to more cash available for spur-of-the-moment decisions like dining out. A month ago, the average for a gallon of regular was $2.60, which had been the lowest level since December 2009, according to AAA.

“I think there clearly will be some lift to the check average both from menu pricing and from mix—from the fact that customers may order another appetizer or another adult beverage or maybe a little bit better cut of steak for dinnertime,” said Bob Derrington, a senior restaurant analyst at Wunderlich Securities.2

In an interview last month with CNBC, Derrington said he liked four restaurant names heading into the new year – Jack in the Box, Buffalo Wild Wings, Red Robin and BJ’s Restaurants — based on lower fuel prices as well as on the companies’ individual strong management teams and reasonable check averages.

(Jack in the Box, Buffalo Wild Wings and BJ’s represent a 12.3% combined weighting in the Eating Out motif.)

Derrington noted that even if gas prices begin to rise, he believes his picks are better situated to handle it given the advantage of strong business plans that he sees translating into better results.

However, he’s cautious about high-end restaurants, especially in locations like Texas, where many jobs depend on the oil industry.

“Normally this is a great time of the year to go out and eat at a really fine dining restaurant … but given what’s going on with potentially oil and gas prices and what … ripple into Texas economy, there may be less celebration this year,” he said.

But, with gas prices down nearly another 20% in the past month, the performance of low- and mid-priced restaurant chains – and their stocks – may have more room to run.

1Katie Little, “Cheap gas, American confidence: A restaurant growth recipe,” cnbc.com, Nov. 14, 2014, http://www.cnbc.com/id/102183440#., (accessed Jan. 12, 2015).

2Michelle Fox, “Low gas prices benefit these restaurants: Analyst,” cnbc.com, Dec. 12, 2014, http://www.cnbc.com/id/102265186, (accessed Jan. 12, 2015).

Tags: eating out