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With the turnaround under way, is Restaurant Group plc now too cheap to ignore?

Shares in Frankie and Benny’s, Garfunkel’s and Chiquito owner Restaurant Group (LSE: RTN) rocketed 10% in early trading this morning as the company hinted that its much-needed turnaround plan was beginning to bear fruit. Does this now make it one of the Footsie’s best bargains or is there still too much risk attached to the shares? Let’s check the numbers.

Back to form?

For the 20 weeks ending 21 May, like-for-like sales fell 1.8%, with total sales down 1.5%. That may not sound great, but a quick check of the company’s full-year results announced in March shows that this actually represents something of an improvement. Back then, the company revealed like-for-like sales had dipped 3.9%.

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Ahead of today’s AGM, Chairman Debbie Hewitt stated that the company had seen “strong performances” from its Concessions and Pub businesses thanks to an increase in passenger numbers and good weather respectively. With many of its sites being in close proximity to cinemas, the Leisure business also appears to be benefitting from healthy admissions at the latter.  

Reflecting that 2017 would be “transitional” for Restaurant Group, Ms Hewitt stated that the company expected to deliver pre-tax profits in line with current market expectations. 

Since January 2016, shares in the firm have sunk from almost 700p to around the 300p mark. They currently trade on a price-to-earnings (P/E) ratio of 14, falling just below this number in 2018 if an understandably modest earnings target is achieved. With a fairly robust balance sheet and near 5% yield on offer for those with the patience to wait for a full recovery in the company’s fortunes, is it now time to take a position?

I’m not convinced. While today’s news (and an upgrade from JP Morgan Cazenove) will no doubt be welcomed by weary holders, I’m still unsure as to why (given the myriad of options available in the market) investors would choose to pile into this stock over others. The same kind of rationale applies to its customers. Sure, menus can be simplified, popular dishes reinstated and prices dropped, but what is there to differentiate Restaurant Group’s offering from the competition? 

While a gradual rise in the share price is possible from here, the lack of any meaningful advantage over its opposition makes me think this stock is still far too expensive to buy.

A far more tempting opportunity

Another company that faces significant near-term hurdles is small-cap Revolution Bars (LSE: RBG). Having been fairly bullish on the stock in the past, I must admit that I was taken aback by last week’s warning by management that costs would be higher than expected and that, consequently, earnings per share growth for the current year would be flat.

Given the market’s tendency to over-punish what it least expects however, I suspect the reaction to this news was overdone. A huge drop in the share price leaves the shares trading on a P/E of just under 10 for the 2016/17 financial year, reducing to eight in 2018 (based on expectations of 16% earnings per share growth). Compared to Restaurant Group, I’m sure most contrarians would find this kind of valuation far more appealing.

Although further profit warnings can’t be ruled out, I remain optimistic on cash-rich Revolution’s prospects over the medium term. A juicy, well-covered 4.6% yield is also adequate compensation for those willing to place an order at the current time.

Recoveries aren't guaranteed

Assuming that all shares eventually recover after falling significantly would be a mistake. That's why it's so important to keep track of your holdings and check that any problems are being rectified by those in charge. 

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.