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Restaurants need the Fed to step in, says Wedbush's Nick Setyan - YouTube
Channel: CNBC Television
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well thanks for having me kelly
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restaurants just need a reset right i
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mean when you just look at restaurants
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uh uh you know just just just just the
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sector by itself
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uh
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you can really understand why defendants
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do what they're doing right i mean what
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we have is 18 type of food cost
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inflation double digit labor inflation
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you can't comp you can't have the type
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of sales growth you need
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in any environment uh to to to grow
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earnings or even that so
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ultimately what what restaurant
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investors should be happy with is a
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recession that results in lower food
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costs in easing labor costs and when you
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look at you know the 2008 to 2010 period
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that's exactly what happened so in other
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words to put it differently what you're
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saying is it's not obviously that
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restaurants want a recession it's that
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inflation is so bad that some kind of
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slowdown that cures that is the best
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they can hope for right now
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i mean it's really the only solution at
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this point you just can't have this type
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of inflation ongoing inflation and we're
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not really seeing any signs that labor
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inflation is going to go away even if
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food costs normalize
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uh if how long can you take you know
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high singles your type of pricing right
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i mean groceries are even higher than
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that so
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um we really do need a reset here but is
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that reset this is again i i love this
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because it's like the macro argument
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we're having and there are some who say
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but that resets happening organically
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and you know things that can't go up to
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the moon and they're they're gonna
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correct and what so explain why you
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think that's maybe not gonna take place
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on its own without a little bit of a
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shove
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well you know the expectation of a
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recession uh is actually uh showing up
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in some commodity prices already right
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so in our opinion june actually marked
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uh the peak of inflation
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and so we've seen things like wheat corn
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oats you know feed costs that tend to be
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the leading indicators
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of of overall food costs peaking in in
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june and having come down along with the
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overall commodity complex right things
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like
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copper gas etc gasoline etc so
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uh there are some early signs that
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inflation may have p based on the
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expectation of a recession uh and so
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hopefully that only continues and i know
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you're not trying to make the call
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yourself whether we're gonna actually be
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in one or at what month or what time but
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what would you say about what's priced
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into the restaurant stocks can you own
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them here or do do you now have to wait
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i think the risk reward is heavily
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skewed towards reward um the scent
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command is as negative
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as
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i've
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you know seen it ever in over 10 decades
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of covering the space i i don't even see
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any criminal sellers at this point right
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the valuations uh even during the
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financial crisis the the company on
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valuations uh dropped in the low teens
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were right under 14 times right now in
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terms of pe
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uh on the franchise names they troughed
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in the very low 20s right now we're at
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20.8 times pe so i think we're if not at
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trough levels in terms of valuation
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we're there again that's barring a
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liquidity crisis that just results in a
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sell-off uh
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you know blind sell-off but uh you know
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x that sort of short few days or a few
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weeks of a liquidity crisis that's
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really where the troughs are in
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restaurants i'm surprised tend to happen
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and they and then they tend to happen
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before
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the last round of earnings revisions
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take place great point an important
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point for as an entry point so wendy's i
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can see
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being on the list um even a wing stop
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why dine equity uh why would that one to
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you be especially attractive here
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yeah
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they own you know ihop and applebee's
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right and they're completely franchise
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concepts and so
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uh you don't have to worry about the
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margin headwinds uh they generate over
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10
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uh free cash flow right now so they can
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buy a ton of stock a balance sheet is as
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good as i remember it's certainly much
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better than that than the pre-kobit
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period applebee's is now a stable uh
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some may even argue a a a low uh you
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know percentage grower top line
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versus a contracting story for for years
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and years right so
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uh that story is transformed
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dramatically pre-code versus postcodex i
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think you know that's a name at a ten
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percent plus free cash flow yield uh
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that investors you know yeah you can
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make bigger mistakes out there yeah
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and they have uh but that's interesting
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it's been balance sheet transformation
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post covered which a lot of people
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myself wouldn't have thought nick thanks
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for your time and for the provocative
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call today
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nick
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of wed bush
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