Businessweek Archives

Outback: Losing Its Sizzle?


Inside Wall Street

OUTBACK: LOSING ITS SIZZLE?

Lately, investors have been quite determined in dumping such high-growth stocks as Home Depot, Wal-Mart, and PepsiCo. Are there any more pricey market stars in danger of being shot down? Donald Zwyer, a special-situations analyst at Salomon Brothers, is convinced that some of the hot restaurant stocks will be next. He's particularly wary of Outback Steakhouse, one of the Street's high-flying favorites.

Initially offered in 1991 at 5 a share, Outback has soared, to 32 in February. Now at 27, it's still enjoying a rich price-earnings ratio of 53.

Zwyer ranks the stock a sell. Outback, which owns and operates 88 full-service steakhouses in Florida, Texas, and other Southern states, is "well-managed and serves fine food," says Zwyer. But he cautions that competition is stiff and costs are on the rise.

One worry is the soaring cost of beef which, the analyst says, has hit all-time highs. Red meat accounts for 20% of the company's operating costs, he notes. Moreover, the cost of labor may jump next year. Zwyer says an increase in the $4.25 hourly minimum wage would crimp Outback's bottom line. He says that a 50 hourly rise would jack up the company's operating costs by $4.4 million, or $2.6 million after taxes. If that happens, he figures that Outback's 1994 net would drop to 90 a share from an estimated $1.

Another big worry: Corporate insiders, who own 10 million of the 25 million shares outstanding, may seek to cash in on the stock's high price. In the past two years, Outback has made three stock offerings. Another one, says Zwyer, may be in the works.GENE G. MARCIAL


Hollywood Goes YouTube
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus