We take a look at three UK restaurant companies, and wonder which ones might be stock market winners in 2007.
If you listened to our My First Share podcast in May, you'll know that restaurant group Belgo was my first ever stock market investment. Sadly, I lost money on that one and I haven't bought a restaurant share since.
I think it's time I took a fresh look at the sector, so here's the lowdown on three interesting restaurant plays.
Gondola Holdings
(LSE: GND)
Gondola owns Pizza Express, the chain which rolled out "casual dining" across the UK in the 90s. It also owns the Ask and Zizzi brands. With a £430m market cap, it's much bigger than most of its rivals and arguably looks cheap on a price/earnings ratio of 13. Fans can also point to strong operational cash flow, jumping 27% in the first half to £47.4m -- impressive stuff.
Sadly, Gondola's revenue grew at a more sedate pace -- total restaurant sales climbed 6.9% while like for like sales ticked up 4%. That's reasonable growth, but not stunning.
Overall, I'm not terribly excited about Gondola. I feel that the Pizza Express brand is getting tired, and Gondola already operates 505 restaurants, so there's not that much scope for expansion by opening new outlets.
I'd rather focus on smaller companies where, if you're lucky or shrewd, you can get bigger share price gains as a new format is rolled out across the country.
The Clapham House
(LSE: CPH)
This is my favourite restaurant share right now. You can argue it's pricey -- at 209p, it trades on a price/earnings ratio of 30 for this year -- but I think there's enough growth potential to justify such a high rating.
Until recently, Clapham owned three restaurant brands: The Real Greek, Gourmet Burger Kitchen and Bombay Bicycle Club. Of the three, I'm most excited about The Real Greek, probably because I've eaten there twice and enjoyed it.
In May, Clapham acquired a fourth brand, Tootsies, and the company doubled in size as a result. The purchase should allow Clapham to increase profits through cost cutting, but the exciting growth should come from new restaurant openings -- especially for the Gourmet Burger chain.
Clapham has identified 100 potential sites for Gourmet Burger; that's quite an increase given that Clapham operates 61 restaurants in total at the moment.
Of course, management could fail to execute their plans successfully, and the business could be hit by an economic downturn or increased security concerns in London. Still, it looks a tasty bet to me.
FishWorks
(LSE: FSH)
FishWorks is the smallest and riskiest company of the three.
It operates an unusual format. Each outlet has a fishmonger at the front and then there's a restaurant serving quality fresh fish at the back. The fishmonger stays open till late in case restaurant diners are tempted to take some fish home with them.
It's a similar concept to Carluccio's
(LSE: CARL)
all-day shop/restaurant approach. In theory, the fishmonger/restaurant format should mean that Fishworks can generate an attractively high return on its invested capital.
FishWorks should have 11 branches by the end of July, and the house broker, Arden Partners, reckons earnings could soar 550% next year to 5.2p, putting the company on a forward price/earnings ratio of 9.
There's clearly a significant risk that the broker is over-optimistic, especially since recent trading hasn't been great -- largely due to problems at a concession in Harvey Nichols' London store. Nevertheless I like the format and I reckon FishWorks could be a restaurant winner in 2007. Just be aware that this is a high risk play.
Of the three, I like Clapham best. There's potential for substantial growth at all its brands, and it's not as risky an investment as FishWorks.
