Darden, Brinker Stocks Rise Ahead of Restaurant Profits

Restaurant stocks have split sharply this year. And that could be related to the number of brands they own.

Actions of Brinker International, Darden Restaurants And International restaurant brands are up about 32%, 18% and 12%, respectively, year to date. These companies all own more than one restaurant chain, with brands collectively ranging from Chili’s to Olive Garden, LongHorn Steakhouse, Burger King and Tim Hortons.

Meanwhile, actions like McDonald’s, Chipotle, How are you, Wendy’s, Shake the cabin And Domino’s have all fallen this year, with several double-digit percentages. These companies all have a main channel under their belt.

These stock moves underscore what some analysts see as the benefits of a diverse restaurant business, especially at a time when any misstep can prompt cash-strapped consumers to go elsewhere when dining out.

Investors will get new insight into how operating multiple chains — or not — affects performance when major restaurant companies report quarterly results starting next week. One company that could be watching the situation is Inspire Brands, owner of chains like Dunkin’, Buffalo Wild Wings and Jimmy John’s, which is moving toward an IPO.

A business built around a core restaurant concept is more dependent on that brand holding consumers’ attention, whereas a business with a portfolio has other sources of potential sales if a brand loses momentum.

That cushion can be critical, but only if another chain is strong enough to take over, according to some Wall Street analysts.

“Darden is probably the best example of the scale, size and diversity of the business,” said Nick Setyan, restaurant analyst at Mizuho Securities. “If one company is not doing well, the others are doing well.”

Setyan said dynamics have played out between Darden’s key brands — Olive Garden and LongHorn Steakhouse — in recent quarters. LongHorn’s growth has outpaced Olive Garden’s for months, and in the most recently reported quarter, LongHorn’s comparable sales increased 6.2%, compared to Olive Garden’s 1.1%.

KeyBanc Capital Markets also cited Darden’s portfolio breadth as a positive in an October research note, saying it gives the company “exposure to a broad range of consumers.” The company’s fine-dining and casual offerings can be beneficial in a K-shaped economy where consumer spending can vary based on income.

The company has a Buy rating on Darden and a price target of $237, up from a price of around $215 on Thursday.

Similarly, Restaurant Brands International provides exposure to different categories and markets through Burger King, Tim Hortons and Popeyes. But his portfolio doesn’t fully protect the company from a weak brand.

In the second quarter, Burger King’s comparable sales in the United States accelerated to 8.5%, compared to 5.8% in the first quarter, while Tim Hortons’ comparable sales in Canada slowed to just 0.1%, compared to 1.5% during the same period. That left the turnaround Burger King carrying a larger share of the portfolio while Tim Hortons stalled.

Setyan said Burger King’s strong recent performance played a central role in the company’s momentum, helped by its ability to better communicate its value products to customers as McDonald’s sales growth slowed.

“Without Burger King’s current performance, I don’t know if (restaurant brands) would be doing as well,” he said.

Mizuho initiated coverage of Restaurant Brands on October 20 with a Buy rating and a price target of $85. Shares are trading at around $76 from Thursday.

Focusing on a single brand can also be an asset. Starbucks And Cheesecake Factory stood out in restaurant stocks this year, showing how a clear brand identity and investment can drive outperformance when execution and customer demand click. Their shares have soared 21% and nearly 123%, respectively, this year.

And Starbucks, for its part, said it would not buy Chipotle after apparently considering a massive buyout that would have diversified its business.