Where’s the beef? You might want to check the stock market.
Shares of West Coast-based burger chain Habit Restaurants (HABT) surged nearly 120% in their market debut Thursday! Why all the fuss for a hamburger joint? This isn’t some sexy tech stock like GoPro (GPRO).
Habit is relatively small, with just 113 Habit Burger Grill restaurants. The majority of them are in California.
But it is growing rapidly. Sales were up nearly 50% in the first three quarters of the year compared to the same period of 2013. It’s also profitable. Net income soared more than 60%.
And apparently it makes a ridiculously good burger.
In fact, the readers of Consumer Reports named Habit the best fast-food burger chain in the country this summer.
McDonald’s (MCD) had the worst. Burger King (BKW) and Wendy’s (WEN) fared poorly as well. So the strong performance for Habit could be bad news for the big chains. Consumers don’t just want cheap burgers. They want them to taste good too.
The top of the Consumer Reports list was dominated by smaller companies that make so-called “better” or “gourmet” burgers, including California cult favorite In-N-Out Burger, Smashburger and Five Guys Burgers & Fries.
Cheeseburgers in paradise. So don’t be surprised if Habit’s success leads to a wave of burger initial public offerings in 2015. Smashburger has been rumored to be considering an IPO for some time. There are also reports that drive-in chain Checkers is mulling one. And Shake Shack, the chain started by New York restaurant legend Danny Meyer, has reportedly already picked bankers for an offering.
These three companies, like Habit, all have backing from prominent private equity firms. That increases the chances that they may one day go public.
Aaron Allen, a global restaurant consultant, added that there is a lot of appeal for many of these burger chains in international markets. Shake Shack already has locations in London, Dubai, Istanbul and Moscow. So an IPO could be one way to help fund international expansion.
It also helps that investors seem to have an insatiable appetite for “fast casual” restaurant stocks these days. Mediterranean restaurant chain Zoe’s Kitchen (ZOES) and grilled chicken franchise El Pollo Loco (LOCO) are two of the hottest IPOs of 2014.
Still, we are just talking burgers and fries here. There are tons of buns out there. A saturated market can be as unhealthy to an investor as saturated fat is to your body.
In addition to all the companies I’ve mentioned, consumers and investors have many other burger options on their menu.
Jack in The Box (JACK) has been a hit on Wall Street this year … but that’s more due to the success of its Chipotle (CMG) competitor Qdoba. Its burger business is reporting much slower growth. And it finished second-to-last in the Consumer Reports rankings.
Three other burger stocks, Steak n Shake owner Biglari (BH), Fuddruckers parent Luby’s(LUB) and Red Robin Gourmet Burgers (RRGB), are all down this year.
“Americans are always going to eat hamburgers. But there needs to be a shakeout,” Allen said. “Everyone on the field is chasing the same ball. There are too many companies in the burger market competing for the same consumer.”
So should investors break their bad “Habit” of buying restaurant IPOs? Probably. It’s very risky. Just like fashion. What’s trendy in the food business now may no longer be hot in a few years .
Look at Krispy Kreme Doughnuts (KKD). It’s the poster child of food fads. The stock had an amazing run for a few years after it went public in 2000. But the stock is now 60% below its all-time high from 2003.
That’s not a tasty return on your investment.
Speaking as a child of the nineties… A quick Name that Tune reader shout-out. While getting ready to write this story, I decided to tweet the following song lyric and asked for the band and album the song was on. “Never thought you’d habit.”
The winner is @count_dressula for correctly identifying it as Pearl Jam from the underrated No Code album.
And off he goes.