Investors Look for Right Time to Bite

A slew of negative economic reports have signaled a recession a clear negative for casual dining operators who depend on consumer spending for their profits.

But early reports for the first quarter show sales may not have been as bad as many investors and analysts initially expected. And the stocks, which were at record lows at the end of December, are still a good value, analysts say.

"If consumer spending power does not contract materially more than we've already seen, estimates and guidance are probably low enough and the stocks will continue to be okay performers," said Raymond James analyst Bryan C. Elliott. "It all depends on consumer spending power."

The investor indigestion began last year, when companies saw sales at established locations, or same-store sales, decline as consumers cut back on spending. Higher commodity costs due to overseas demand and supply concerns also started shrinking profits.

A drop in second-quarter profit at Darden Restaurants Inc., which operates the Olive Garden and Red Lobster chains, spurred a broader sell-off. The day after Darden reported its results in December, seven casual dining companies hit 52-week lows.

The low share prices "created a lot of value interest," Elliott said. A number of investors also shorted the stocks, meaning they bet the prices would fall further as the economy worsened.

But rather than the slide many predicted, the stocks outperformed the S&P in the first three months of 2008. Morgan Keegan analyst Robert M. Derrington said casual dining stocks slipped about 6 percent on average in the first quarter. The S&P, meanwhile, dropped 13 percent.

But with fears of a recession nipping at investors, the overall rally has not been smooth.

"The economy has worsened and the belief we're in a recession has gotten a little bit more pronounced, a little bit more vocal," Derrington said.