The Top 3 Restaurant Stocks for the 1st Half of 2014

There are more than 30 restaurant names on this Fool's watchlist. So far this year, three names stand out for their outperformance: Jack in the Box , Burger King Worldwide , and Ignite Restaurant Group . What are these three restaurants doing to put them at the head of the pack, and will their run continue for the rest of the year?

You don't know Jack
Shares of both Jack in the Box and Burger King Worldwide are up about 20% in the first half of 2014. When Fools mention Jack in the Box, they think of the hamburger chain. However, its subsidiary Qdoba Mexican Grill is driving the growth story. The result is that Jack in the Box is delivering top- and bottom-line growth, driving the share price higher.

Source: Jack in the Box

In the most recent quarter, same-store sales grew 0.7% at Jack in the Box, while Qdoba Mexican Grill posted a 7% increase in same-store sales. This is quite the feat, as many restaurant chains are struggling right now. Company earnings grew from $0.33 per share in the second quarter of last year to $0.43 per share in this year's second quarter. Jack in the Box benefited from the sales growth at Qdoba and also expanded its margins and reduced its overhead. These are all positives one looks for when it comes to investing in the restaurant business.

Source: Qdoba Mexican Grill

For the second half of the year, the company is expecting same-store sales to accelerate at Jack in the Box. The hamburger chain's same-store sales are expected to increase to between 1.5% and 2.5%. Same-store sales are expected to moderate slightly at Qdoba Mexican Grill. There, sales are expected to be 3% to 4% higher. In terms of store growth, about 10 new Jack in the Box locations will likely open, but the real growth will come from Qdoba Mexican Grill. The company plans to open 50 new Qdoba restaurants this year.

It's good to be the king
Investors are really buying into the refranchising model. Burger King has been getting out of owning its restaurants and has instead been becoming a franchisor. The result is that Burger King now has some of the highest margins in the business. Its gross margin last quarter was 78%, and its operating margin came in at 55%. Compare this to McDonald's, which has a gross margin of 38% and an operating margin of 30%.

Source: Burger King

In the most recent quarter, global same-store sales increased 2%. Overall, systemwide sales increased 6.9% from last year. Burger King saw growth across all four of its geographic markets. The fastest-growing region for Burger King was Europe, the Middle East, and Africa. There, same-store sales increased at an impressive rate of 4.8%. Like McDonald's, the U.S. and Canadian markets remain weak. However, Burger King did manage to post an increase of 0.1% in same-store sales in its largest market. Earnings per share increased slightly more than 19% to $0.20.

Source: Burger King

Going forward, Burger King remains focused on trying to grab market share from McDonald's. Burger King has been aggressive in trying to boost its breakfast business, launching the Big King to take on the Big Mac and even launching a new slogan: "Have It Your Way" is now "Be Your Way."

The turnaround is lit
Ignite Restaurant Group is a restaurant I highlighted back in December as a possible turnaround candidate. Well Fools, the turnaround looks to be gaining some traction, considering that shares are up 15% year to date. A large part of this rise is coming from the success of its Brick House Tavern + Tap. The strong results there offset the weakness Ignite saw at its Romano's Macaroni Grill and Joe's Crab Shack concepts.

Source: Ignite Restaurant Group

In the most recent quarter, same-store sales increased 10% at Brick House, while Joe's Crab Shack posted a decline of 6% and Macaroni Grill saw a decline of 4.1%. Joe's Crab Shack was hit especially hard since many of its locations have outdoor dining. The severe winter weather across most of the nation closed that area off to diners.

Source: Brick House Tavern + Tap

As for Macaroni Grill, Ignite has been working to turn around the struggling Italian restaurant chain ever since it purchased the business last year. Earlier this year, Ignite appointed the former CEO of Famous Dave's of America as Macaroni Grill's new president. His task is to improve Macaroni Grill and take the fight to Olive Garden in the battle of the Italian restaurant chains.

Going forward, the strategy at Ignite is to better manage the restaurants in its portfolio. Part of this includes converting underperforming locations to Brick House Tavern + Tap restaurants. Ignite created the Brick House brand as a real estate management option. The good news is that Brick House has become a growth driver for the company. This year, Ignite plans to convert five Macaroni Grill locations to Brick House restaurants.

Foolish final thoughts
While it's tough to say how these three restaurants will fare for the rest of the year, the market is so far liking what it's seeing. Jack in the Box is counting on continued growth at Qdoba Mexican Grill. Burger King is counting on more weakness from McDonald's. Ignite Restaurant Group is looking to stem the sales decline at Macaroni Grill and continue growing its Brick House Tavern + Tap locations. If these three restaurants can accomplish their objectives, I think the trend of a higher share price is still in store for all three.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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