Restaurant stocks have been strong investments over the past several months, in part because of mild winter weather, as well as what appears to be increased likelihood of an easing in commodity inflation, which would bolster margins, says Sharon Zackfia, CFA, a Partner and Group Head-Consumer Sector, at William Blair & Company, L.L.C.
“I think the good news, from an investing perspective, is that for the most part investors looked through the commodity-cost pressure of last year, because companies with strong traffic growth typically have sufficient pricing power to ultimately support margins,” she said.
Zackfia likes Chipotle Mexican Grill, Inc. (CMG) because it’s been a stock that has performed well over the past several years although Chipotle did not top earnings expectations much in 2011. She says she believes the company is at an inflection point, and consensus estimates are again beatable. Also, Chipotle, which experienced significant commodity-cost pressure in 2011, still rose roughly 60% last year.
“We think there is the opportunity for Chipotle to potentially take more price, but at a minimum, it seems all but assured that commodity inflation will ratchet down to something more in the mid-single-digit range this year versus the double-digit inflation that the company periodically experienced last year,” Zackfia said.
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