Why Are Restaurant Stocks Up During The Market Selloff?

Amid the heavy market selling on Tuesday, restaurant stocks have performed relatively well. Shares of Cheesecake Factory Inc (NASDAQ: CAKE), Chipotle Mexican Grill, Inc. (NYSE: CMG), McDonald’s Corporation (NYSE: MCD) and Sonic Corporation (NASDAQ: SONC) were all in the green on Tuesday morning.

Part of the buying could be in response to strong Q1 earnings from Denny’s Corporation (NASDAQ: DENN), which was up more than 7.4 percent on Tuesday. Stephens analyst Will Slabaugh is among the Denny’s bulls.

“We believe the Company’s ability to sustain such levels of SSS growth along with a consistent earnings profile of its 90 percent franchised mix is supportive of the stock’s premium valuation,” Slabaugh explained. Stephens has an Overweight rating on Denny’s and a $12 price target on the stock.

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But restaurants may be getting a boost from commodity prices as well.

Morgan Stanley reported that commodity food costs dropped 5.0 percent moth-over-month (M/M) in April. An 11 percent M/M decline in cheese prices likely provided a major boost to the margins at Domino’s Pizza, Inc. (NYSE: DPZ) and Cheesecake Factory.

“Given the contracting cycle for most restaurants, we’d expect to see more of this deflation show up in the P&Ls of restaurants this year, versus last year when we saw a 6 percent decline in the commodity basket as measured by our index,” Morgan Stanley analyst John Glass concluded.

Disclosure: The author holds no position in the stocks mentioned.